TECHNICAL ANALYSIS OF STOCKS
What is Technical Analysis?
Technical analysis is the interpretation of the price action of a company’s underlying stock (or any tradable financial instrument). It utilizes various charts and statistical indicators to determine price support/resistance, range and trends. It identifies historically relevant price patterns and behaviors to help forecast potential direction of the stock. This methodology focuses only on the price of the shares, not the operations of the company.
How Does Technical Analysis Work?
By using historical price data, technical analysis attempts to interpret the supply and demand that moves share prices. Dinosaurs can’t walk in the sand without leaving footprints. The dinosaurs are the institutions, mutual and hedge funds. They are the participants that move stock prices. Technical analysis visually tracks the activity of the dinosaurs using various charts and indicators to pinpoint price areas of strong interest both in terms of buying and selling. History tends to repeat itself as evidenced by price patterns.
Who is Technical Analysis For?
Anyone who trades or invests in the stock market or any other tradable financial instrument should consider learning at least a basic level of technical analysis. It your money is invested into a position that has price movement, then technical analysis will help you make better-informed decisions as to how much risk to employ for how much potential reward.
Stocks represent the underlying company’s business and operations. However, the perception and future valuation of the company and its performance is reflected into its stock price. There is often a divergence between the two. Technical analysis also helped to determine where the divergence lies and how much opportunity may exist. Keep your eyes open for the next part !
By - Pranit Bhandari