Technical analysis is the study of price and volume changes over time. Technical analysis usually involves the use of financial charts to help study these changes. Any person who analyzes financial charts can be called a Technical Analyst.
Despite being surrounded with data, charts, raw numbers, mathematical formulas, etc., technical analysts are really studying human behavior – specifically the behavior of crowds with respect to fear and greed. All of the investors that have an interest in a particular stock can be considered to be “the market” for that particular stock and the emotional state of those investors is what determines the price for that stock. If more investors feel the stock will rise, it probably will. If more feel that the stock will fall, then it probably will fall. Thus, a stock’s price change over time is the most accurate record of the emotional state – the fear and the greed – of the market for that stock and thus, technical analysis is, at its core, a study of crowd behavior.
The reason technical analysis offers value is that directional price moves are often sustained for a period of time allowing analysts to detect and profit from the change in price. Even though a technical analyst has many math-based tools to analyze price and volume movement, the process is ultimately an art in the study of human behavior.
All investors are faced with three basic questions with their investments. What to invest in, when to buy, and when to sell. Technical analysis provides a framework for investors to methodically select equities and pick times to buy and sell. Emotion, the investor’s nemesis, is greatly reduced in these decisions since the investor can develop a list of “what and when” rules to follow. Rather than “buying and hoping for the best”, technical analysts know how much risk they are taking when they open a position, they have an idea of the probability that the trade will work, and know when to exit a position.
Only historical price and volume data is used for technical analysis, along with permutations of this data that create indicators that can be viewed on a chart in conjunction with the stock price data. The premise of technical analysis is that all known information such as what a company does, its financial results, analyst’s ratings, management performance, politics, news, etc. are reflected in the historical price and volume data.
It is important to understand that technical analysis can only be used to determine the likely direction of future prices. It cannot anticipate news events or how investors will respond to them.
The graph above is a historical price chart for the company Analog Devices, Inc., ticker symbol ADI. The line represents the price of ADI over a period of a year. The price chart illustrates how prices can move up, down or sideways for months at a time. Technical analysis uses methodologies to help indicate when prices are beginning to change direction. The goal of a technical analyst is to buy an equity when the price chart indicates prices are beginning to move up, and then sell when the price chart indicates prices are beginning to move sideways or down.
The example above illustrates the layout of a typical SharpChart of Microsoft Corp., symbol MSFT, courtesy of stockcharts.com. This is a typical chart that a technical analyst would use. Price data, daily trading volume (the histogram), and technical indicators such as a 50 day simple moving average (SMA), and a 200 day SMA are displayed. Moving averages such as the 50 day and 200 day SMA’s are usually drawn on the chart by a technical analyst because it provides valuable insight into price trend.
The indicator shown below the price data pane is the MACD, which is a popular technical indicator. A technical indicator is a mathematical expression of price and/or volume which can provide insight into future price movements. For more information on the MACD indicator, along with dozens of other popular indicators please visit stockcharts.com.
What is Technical Analysis?
Technical analysis is the study of price and volume changes over time. Technical analysis usually involves the use of financial charts to help study these changes. Any person who analyzes financial charts can be called a Technical Analyst.
Despite being surrounded with data, charts, raw numbers, mathematical formulas, etc., technical analysts are really studying human behavior – specifically the behavior of crowds with respect to fear and greed. All of the investors that have an interest in a particular stock can be considered to be “the market” for that particular stock and the emotional state of those investors is what determines the price for that stock. If more investors feel the stock will rise, it probably will. If more feel that the stock will fall, then it probably will fall. Thus, a stock’s price change over time is the most accurate record of the emotional state – the fear and the greed – of the market for that stock and thus, technical analysis is, at its core, a study of crowd behavior.
The reason technical analysis offers value is that directional price moves are often sustained for a period of time allowing analysts to detect and profit from the change in price. Even though a technical analyst has many math-based tools to analyze price and volume movement, the process is ultimately an art in the study of human behavior.
All investors are faced with three basic questions with their investments. What to invest in, when to buy, and when to sell. Technical analysis provides a framework for investors to methodically select equities and pick times to buy and sell. Emotion, the investor’s nemesis, is greatly reduced in these decisions since the investor can develop a list of “what and when” rules to follow. Rather than “buying and hoping for the best”, technical analysts know how much risk they are taking when they open a position, they have an idea of the probability that the trade will work, and know when to exit a position.
Only historical price and volume data is used for technical analysis, along with permutations of this data that create indicators that can be viewed on a chart in conjunction with the stock price data. The premise of technical analysis is that all known information such as what a company does, its financial results, analyst’s ratings, management performance, politics, news, etc. are reflected in the historical price and volume data.
It is important to understand that technical analysis can only be used to determine the likely direction of future prices. It cannot anticipate news events or how investors will respond to them.
The graph above is a historical price chart for the company Analog Devices, Inc., ticker symbol ADI. The line represents the price of ADI over a period of a year. The price chart illustrates how prices can move up, down or sideways for months at a time. Technical analysis uses methodologies to help indicate when prices are beginning to change direction. The goal of a technical analyst is to buy an equity when the price chart indicates prices are beginning to move up, and then sell when the price chart indicates prices are beginning to move sideways or down.
The example above illustrates the layout of a typical SharpChart of Microsoft Corp., symbol MSFT, courtesy of stockcharts.com. This is a typical chart that a technical analyst would use. Price data, daily trading volume (the histogram), and technical indicators such as a 50 day simple moving average (SMA), and a 200 day SMA are displayed. Moving averages such as the 50 day and 200 day SMA’s are usually drawn on the chart by a technical analyst because it provides valuable insight into price trend.
The indicator shown below the price data pane is the MACD, which is a popular technical indicator. A technical indicator is a mathematical expression of price and/or volume which can provide insight into future price movements. For more information on the MACD indicator, along with dozens of other popular indicators please visit stockcharts.com.
Source: stockcharts.com