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Technical Analysis - How Does It Work?
Technical analysis does not concern itself with the value of the company, but with the price movements in the market, which is based on three main principles. The first is that the price of a security or currency already reflects everything known to the market that could affect it that is, those factors analyzed in fundamental analysis are already discounted by the market. The only thing that needs to be analyzed is price movement, influenced by supply and demand. The second principle is that prices move in trends, so analyzing the patterns of current price behavior is very effective, and the third is that patterns of price movements repeat themselves. On the basis of these three assumptions, technical analysts use two main tools to understand the trends and patterns. The main tool used is charts, which is why technical analysts used to be known as chartists. Using these charts, the prices of the security are plotted into a curve, showing the way the prices are trending. Without a chart, the price at closing, or at any given point in time, would have no meaning, but the chart shows whether the trend is up or down and so can be used as a basis for information. The original charts used in technical analysis were just simple lines, but with the growth of technology, more complex types of chart like candlestick or bar charts are increasingly being used. The bar chart consists of a vertical line representing a specified period of time, for instance a day, and provides four specific pieces of information: the highest and lowest prices reached during that period, and the prices at the opening and closing of that period. A candlestick chart displays the same four pieces of information high, low, open and close but more graphically, using the body of the candle, the tail (a line going down) and the wick (a line going up). With a candlestick chart, it is possible to see at a glance what the markets are doing. This helps in very quick decision making, so candlestick charts tend to be very popular. The other main tool of technical analysis is indicators. These are representations in graphical form of various mathematical formulae, looking at whether a stock is strong or weak in relation to its past action, and whether it is overbought or oversold. There are huge numbers of these formulae that can be used, and hence there are vast numbers of technical indicators. Many people believe that the indicators can be self-fulfilling, because the more investors who are acting on the same indicator, the stronger and more effective a predictor that indicator becomes. Many people have questioned the validity of technical analysis over the years, but recently its credibility has increased. Most major brokerages employ both fundamental and technical analysts, and some analysts achieve success by combining components of both types. Whether or not this approach is seen as sound, there can only be benefits from understanding both sides. Article Directory: http://www.articledashboard.com Enrol for technical analysis course with expert stock traders. Refer the link to view site for information on stock trading. |
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