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Stock Technical Analysis
Stock Technical Analysis In Australia is diametrically opposed to fundamental analysis, which is the basis of all the methods discussed so far in this tutorial.Technical analysts select stocks by analyzing statistics on market activity, prices and past trading volumes. Sometimes called chartists, technical analysts look at price charts and different indicators to infer future stock price movement.
Technical Analysis Philosophy
In his book Charting Made Easy, technical analysis guru John Murphy introduces his readers to the study of technical analysis, explaining its basic principles and tools. Here is how he presents the theories behind technical analysis:
Chart analysis (also called technical analysis) is the study of stock market movement using price charts with the aim of predicting the future direction of prices.
The cornerstone of the technical approach is the belief that all factors that influence market price – fundamentals,
political events, natural disasters and psychological factors – are quickly discounted by market activity… In other words, the impact of these external factors quickly translates into any price movement, up or down.
The most important assumptions on which all the processes of technical analysis are based are summarized as follows:
Prices already take relevant information into account: they “discount” it. In other words, markets are efficient.
Prices move according to trends.
The Story Repeats Itself.
What Technical Analysts Don’t Care About
Pure technical analysts don’t care at all about a company’s elusive intrinsic value or other factors fundamental analysts care about,
like the management team, business model, or competition.
They are interested in trends seen in past data, charts and indicators and they often make a lot of money trading stocks of companies they know almost nothing about.
Is Technical Analysis a Long Term Strategy?
The answer to the above question is a resounding no.
Technical analysts are usually very active in their operations; they hold their stocks for short periods so as to take advantage of price fluctuations, whether up or down.
They can establish either a short position or a long position on a given security,
depending on the direction the price should follow according to their calculations.
If a stock does not move in the direction the analyst predicts.
He wastes no time deciding whether or not to liquidate his position and issues a sell stop order to limit his losses.
While a value investor has to be very patient and wait for the market to fix a company’s undervaluation,
the technical analyst has to be a very nimble trader and know how to create and liquidate positions. rapidly.
Support and Resistance
Support and resistance are among the most important concepts in technical analysis.
Support is the level at which technical analysts expect a stock price to begin to rise, while resistance is the level at which the price will begin to decline after rising.
Trades are usually made when the price is around these key levels,
as these signal the new direction the price will move in.
Analysts establish a long position, if they believe a support level has been reached, or create a short position, if they believe the stock has reached a resistance level.
Stock Picking Using Technical Analysis
Technical analysts have a very well-stocked toolbox. They can literally look at hundreds of indicators and chart formations to determine which stocks to pick.
However, it is important to emphasize that no indicator or chart formation is infallible or absolute;
the technical analyst must interpret them and this process is more subjective than mathematical. Let’s take a quick look at two of the most popular chart (price) formulas with technical analysts.
Cup and Handle
This bullish formula looks like a pan ending in a handle.
Since the stock price is expected to rally at the end of the handle,
investors can make a lot of money buying the stock at this point. Another reason for the popularity of this formula is that it is easy to spot.
Head and Shoulder
This formula looks like… a head between two shoulders. Technical analysts usually consider it a bearish formula.
Remember that these two examples are just a glimpse of the vast field that is technical analysis and its methods. No stock picking tutorial would be complete without technical analysis, but we’ve only scratched the surface here.
Technical analysis is unlike any other stock-picking strategy:
it has its own set of concepts and relies on an entirely different set of criteria than fundamental-based strategies. However, regardless of its analytical approach, technical analysis requires discipline and common sense, just like any other strategy.
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