The stock market used to be filled with technical analysts deciding
what to buy and sell, until it was decided that their success rate is no
better than chance. Now technical stock analysis is virtually
non-existent.
Research and examination of the market and securities as it relates
to their supply and demand in the marketplace. The technician uses
charts and computer programs to identify and project price trends. The
analysis includes studying price movements and trading volumes to
determine patterns such as Head and Shoulder Formations and W
Formations. Other indicators include support and resistance levels, and
moving averages. In contrast to fundamental analysis, technical analysis
does not consider a corporation’s financial data.
Technical analysts study trading histories to
identify price trends in particular stocks, mutual funds, commodities,
or options in specific market sectors or in the overall financial
markets. They use their findings to predict probable, often short-term,
trading patterns in the investments that they study. The speed (and
advocates would say the accuracy) with which the analysts do their work
depends on the development of increasingly sophisticated computer
programs.
Technical Analysis supposes markets have memory.If so, past prices,
or the current price momentum, can give an idea of the future price
evolution. Technical Analysis is a tool to detect if a trend (and thus
the investor’s behavior) will persist or break. It gives some results
but can be deceptive as it relies mostly on graphic signals that are
often intertwined, unclear or belated. It might become a source of
representiveness heuristic (spotting patterns where there are none)
Technical analysis has become increasingly popular over the past
several years, as more and more people believe that the historical
performance of a stock is a strong indication of future performance. The
use of past performance should come as no surprise. People using
fundamental analysis have always looked at the past performance of
companies by comparing fiscal data from previous quarters and years to
determine future growth. The difference lies in the technical analyst’s
belief that securities move according to very predictable trends and
patterns. These trends continue until something happens to change the
trend, and until this change occurs, price levels are predictable.
There are many instances of investors successfully trading a security
using only their knowledge of the security’s chart, without even
understanding what the company does. However, although technical
analysis is a terrific tool, most agree it is much more effective when
used in combination with fundamental analysis.
Fundamental Analysis
Fundamental analysis looks at a share’s market price in light of the
company’s underlying business proposition and financial situation. It
involves making both quantitative and qualitative judgments about a
company. Fundamental analysis can be contrasted with ‘technical
analysis’, which seeks to make judgements about the performance of a
share based solely on its historic price behavior and without reference
to the underlying business, the sector it’s in, or the economy as a
whole. This is done by tracking and charting the companies stock price,
volume of shares traded day to day, both on the company itself and also
on its competitors. In this way investors hope to build up a picture of
future price movements.
