Technical AnalysisTechnical Analysis is a type of stock analysis that deals with a stocks trend and price patterns. This study has proven to be a very good indicator when used correctly. Technical Analysis assumes four things. 1. All important information is already priced into the stock. In other words a company’s earnings, assets, liabilities are already factored into a stock at all times. Because of this it is not necessary to examine the fundamentals of a company before placing a trade. 2. Prices move in predictable patterns. The technical’s state the price of a stock will move in predictable price patterns. These patterns can be seen in stocks and will clearly repeat themselves again and again. 3. Prices tend to move in a trend and tend to stick with that trend. In other words if a stock is trending upward it is more likely to continue trending upward then come down all of a sudden. The same applies for a stock that is trending downwards. A stocks trend is a huge factor when deciding whether to enter the position or not. This leads to the famous saying “the trend is your friend until a new one begins” 4. History repeats itself. This assumes that the majority of people will make the same decisions in the future as they did in the past when it comes to investing. This in turn causes the markets to react in a similar way in the future as they did in the past. This is really the cornerstone of technical trading. One of the basic theories of technical analysis is the theory of support and resistance. These are imaginary tops (resistance) and bottoms (support) of stocks that can help predict the future price movements of stocks.We can look at the stock SLR as an example of this. This stock has been bouncing between $3.15 and $3.5 for four months. Because the stock has just hit the support level at $3.15 it is expected to go up.
A technical trader would buy the stock at this point and wait for it to go up to around $3.5 before exiting the position. They would also assume that it would take around 10 days for the move to occur because that is the average time it takes for this stock to move between support and resistance. Technical analysis comes from hundreds of years of observing price movements. Homma Munehisa developed the first form of technical trading in the 18th century. Charels Dow also played an important role in the development of technical trading in the 19th century. Today the study is continuously growing and has adjusted to many different trading types.
Also remember if a stock breaks out of its support and resistance range it is considered a break out and will probably continue to move away from it's old pattern. In this case you would want to get out of the trade and cut your loses short. Other Technical Analysis techniques are MACD Stochastics Volume Candle Sticks and Moving Average. To learn more click on their name/links. Remember to always trade with the trend never against it. "the trend is your friend" Related Articles
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