What is Technical Analysis?
Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts make use of historical price and volume data to prepare charts, graphs and other tools in order to identify patterns that can suggest future activity.
Table of Contents
- 1 What is Technical Analysis?
- 2 Assumptions of Technical Analysis
- 3 Tools of Technical Analysis
- 4 Disadvantages of Technical Analysis
- 5 Difference Between Technical Analysis and Fundamental Analysis
It is a school of thought that the share price depends purely on the supply demand of the share and hence looking at the previous trend buy or sale, it is possible to predict the future price of a script.
According to them, price are determined in the following manner:
- Demand & supply of securities are considered to be the main essence of the changes in the securities price.
- Technical analysis is a method of presenting financial data of the past behavior and to find out the history of price movements and depict these on a chart.
- The chart have a method of prediction of significant price movements, depicts meaningful patterns and the practical applications of these patterns help in determining future prices.
- Typical charts are made for making prediction about a single security and Charts are also used to find out the total broad spectrum of the market.
Assumptions of Technical Analysis
The technical school of thought has certain assumptions. These assumptions of technical analysis are:
- The market value of a security is related to demand and supply factors operating in the market.
- There are both rational and irrational factors which surround the supply & demand factor of a security.
- Security price behave in a manner that their movement is continuous in a particular direction for some length of time.
- The movement of security prices if going upward will continue to do so for a while barring certain minor fluctuations in stock prices.
- Trends in stock prices have been seen to change when there is a shift in the demand and supply factors.
- Whenever there are shifts in demand and supply they can be detected through charts prepared specially to show market action.
- Patterns which are projected by charts record price movements and these recorded patterns are used by analysts to make forecasts about the movement of price in future.
Tools of Technical Analysis
The technician must identify the trend and recognize when one trend comes to an end and prices set off in the opposite direction. His central problem is to distinguish between reversals within a trend and real changes in the trend itself. This problem of sorting out price changes is critical, since prices do not change in a smooth, uninterrupted fashion.
The two variables concerning groups of stocks or individual stock are:
- Behavior of prices
- Volume of trading influenced by changing prices
The use of technical ‘indicators’ to measure the direction of overall market should precede any technical analysis of individual stock, because of systematic influence of the general market on stock prices. In addition, some technicians feel that forecasting aggregates are more reliable, since individual errors can be filtered out. Indicators of Technical analysis can be tabulated as:
Ironically, there is no standard procedure followed by all technical analysts. Basically they follow the Dow theory and a number of empirical rules developed by chartists for interpreting market movement. Many analysts use the moving average methods in addition to the Dow theory for predicting price trend.
The following are the popular methods of doing technical analysis:
Dow Theory
The Dow Theory, originally propounded by Charles Dow in 1900, is the oldest and most publicized technical analysis to identify trends. This theory seeks to study the major movements in the market with a view to establish trends. Until a reversal occurs, a trend is assumed to exist. It is important to note that, the Dow theory only describes the direction of market trends and does not attempt to forecast future movement or estimate either the duration or the size of such market trend.
The theory uses the behavior of the stock market as a barometer of business conditions, rather than as a basis for forecasting stock prices themselves. Therefore, the tenets of the theory were framed with reference to market indexes, specifically constructed to measure market trends.
Trend
One of the most important concepts in technical analysis is that of trend. The meaning in finance isn’t all that different from the general definition of the term – a trend is really nothing more than the general direction in which a security or market is headed. In other words, defining a trend goes well beyond the obvious.
In any given chart, you will probably notice that prices do not tend to move in a straight line in any direction, but rather in a series of highs and lows. In technical analysis, it is the movement of the highs and lows that constitutes a trend. For example, an uptrend is classified as a series of higher highs and higher lows, while a downtrend is one of lower lows and lower highs.
Types of Trend
There are three types of trend:
- Positive or advancing trend
- Negative or declining trend
- Neutral or sideways trading range.
Positive Trend (Characterized by higher highs and higher lows)
In a positive trend each up move extends to new price highs while the sell-offs in between do not decline as far as the price levels seen on previous sell-offs. Drawing a line through the lows yields the positive trend line. It is also known as Uptrend.
Negative Trend (Characterized by lower highs and lower lows)
In a negative trend each down move extends to new price lows while rallies in between do not advance as far as the price levels seen on previous rallies. Drawing a line through the highs yields the negative trend line. It is also known as Downtrend.
Neutral Trend (Characterized by a sideways trading range)
In a neutral trend the price pattern typically oscillates between an upper limit and a lower limit. Drawing lines through these upper limits and lower limits identifies the trading range. It is also known as Sideways or Horizontal trend.
Trend reversal
The rise or fall in share price cannot go on forever. The share price movement may reverse its direction. Before the change of direction, certain pattern in price movement emerges. The change in the direction of the trend is shown by violation of the trend line.
Violation of the trend line means the penetration of the trend line. If a scrip price cuts the rising trend line from above, it is a violation of trend line and signals the possibility of fall in price. Like-wise if the scrip pierces the, trend line from below, this signals the rise in price.
The six basic tenets of the Dow Theory are as following:
1. Market has Three Movements
The Dow Theory classifies the movements in stock prices into:
Primary Movements
In Dow theory, the primary trend is the major trend of the market, which makes it the most important one to determine. Dow determined that a primary trend will generally last between one and three years but could vary in some instances, represent the major market trends. The primary trends are the long range cycle that carries the entire market up (bull market) or down(bear market).
Secondary Movements
In Dow theory, a primary trend is the main direction in which the market is moving. Conversely, a secondary trend moves in the opposite direction of the primary trend, or as a correction to the primary trend.
For example, an upward primary trend will be composed of secondary downward trends. This is the movement from a consecutively higher high to a consecutively lower high. In a primary downward trend the secondary trend will be an upward move, or a rally. This is the movement from a consecutively lower low to a consecutively higher low. Thus, the secondary trend acts as a restraining force on the primary trend.
Minor Movements
The last of the three trend types in Dow theory is the minor trend, which is defined as a market movement lasting less than three weeks . The minor trend is generally the corrective moves within a secondary move, or those moves that go against the direction of the secondary trend. The minor trends are of very little importance, because of their short duration and high fluctuations in the prices of stocks.
2 Average Discount everything
The stock prices reflect all possible information, private and public. Any surprise news will be reflected in the stock price, commodity price, and stock index very quickly. The share prices that are determined in the market evolve out of a discounting process that takes all known and predictable factors into account.
3. Price Action Determines the Trend
In a bull market the peak of successive rallies should increase and also the trough of the secondary movements should increase too. It means we will see higher highs and higher lows in a bull market. The reverse is correct in a bear market; we should see lower lows and lower highs in a bear market.
4. Line Indicate Movements
Sometimes the secondary movement is horizontal, and this is called line. It should last for few weeks. In a bull market, line formation implies smart money is accumulating and in a bear market, line indicates distribution from strong hand to week hand.
5. Price/Volume Relationship Provide Background
According to Dow theory, the main signals for buying and selling are based on the price movements of the indexes. Volume is also used as a secondary indicator to help confirm what the price movement is suggesting. From this tenet it follows that volume should increase when the price moves in the direction of the trend and decrease when the price moves in the opposite direction of the trend.
Generally volume should go with the trend and we have the following relationship between volume and price:
| Price | Volume | Interpretation |
|---|---|---|
| Rising | Up | Volume confirms price rise, bullish |
| Rising | Down | Volume indicate weak rally, correction or reversal is possible. Bearish |
| Declining | Up | Volume confirms price fall, bearish |
| Declining | Down | Volume indicate weak price decline, consolidation or reversal |
6. Averages Must Confirm
The market is truly a barometer of future business conditions. The industry averages and market averages should by and large move together.
Price vs Volume Change
Technical anlaysis believe that price and volume are closely related. There are four rules:
- A rising index with an increasing volume will indicate a bullish market and a ‘buy’ signal as it reflects unsatisfied demand in the market.
- A falling index with decreasing volume shows a bullish signal.
- When volume tends to increase during index declines, it is a bearish signal.
- When volume tends to decrease as the index rises, it is a bearish signal.
Advance Decline Line
The rules are as follows:
- A rising NSE index (NIFTY) with a falling advance-decline line indicates that in spite of a rise in about 50 blue chips in the NSE index, many small stocks are beginning to turn down. This is an indication of a weakening market and gives a bearish signal.
- A fall of NSE index with a rising advance decline line gives a bullish signal.
- Technical analysts also believe that when the cumulative number of advance exceeds declines by 2000 over a ten day period, the market may be “overbought” & vice versa.
New High & New Low indicator
A rising market should normally view an expanding number of stocks hitting new high prices & decreasing new low prices Conversely, a declining market is usually accompanied by an increasing number of new lows and decreasing number of new highs.
Charting
The basic tool in technical analysis is movement in prices, measured by charts. There are four main types of charts that are used by investors and traders depending on the information that they are seeking and their individual skill levels. The chart types are: the line chart, the bar chart, the candlestick chart and the point and figure chart.
Line Chart
The most basic of the four charts is the line chart because it represents only the closing prices over a set period of time. The line is formed by connecting the closing prices over the time frame. The charts are easily drawn and widely used in technical analysis.
The price is marked on the Y-axis and the period of time on the X-axis. Line charts are helpful in easily identifying price patterns. Line charts do not provide visual information of the trading range for the individual points such as the high, low and opening prices.
However, the closing price is often considered to be the most important price in stock data compared to the high and low for the day and this is why it is the only value used in line charts.
Bar Charts
The bar chart expands on the line chart by adding several more key pieces of information to each data point. The chart is made up of a series of vertical lines that represent each data point. This vertical line represents the high and low for the trading period, along with the closing price.
The close and open are represented on the vertical line by a horizontal dash. The opening price on a bar chart is illustrated by the dash that is located on the left side of the vertical bar. Conversely, the close is represented by the dash on the right.
Generally, if the left dash (open) is lower than the right dash (close) then the bar will be shaded black, representing an up period for the stock, which means it has gained value. A bar that is colored red signals that the stock has gone down in value over that period. When this is the case, the dash on the right (close) is lower than the dash on the left (open).
Candlestick Charts
The candlestick chart is similar to a bar chart, but it differs in the way that it is visually constructed. Similar to the bar chart, the candlestick also has a thin vertical line showing the period’s trading range. The difference comes in the formation of a wide bar on the vertical line, which illustrates the difference between the open and close.
And, like bar charts, candlesticks also rely heavily on the use of colors to explain what has happened during the trading period. A major problem with the candlestick color configuration, there are two color constructs for days up and one for days that the price falls.
When the price of the stock is up and closes above the opening trade, the candlestick will usually be white or clear. If the stock has traded down for the period, then the candlestick will usually be red or black. If the stock’s price has closed above the previous day’s close but below the day’s open, the candlestick will be black or filled with the color that is used to indicate an up day.
Point and Figure Chart
Though the point and figure chart (PFC) is not as commonly used as the other two charts. PFC’s does not include volume or time. Construction of PFC involves the use of two symbols ‘X’ and ‘O’ while ‘X’ indicated increase in prices, ‘O’ indicates downward movement.PFC’s are plotted on cross- section paper that has arithmetically ruled squares.
Suppose that a 1-point PFC is to be plotted. The graph may begin by recording the price at a chosen level. Across the price levels marked on the Y-axis, either ‘X’ or ‘O’ is marked for the beginning price.
Subsequent change in price level is noted. If the price increases, for every increase equal to, or over Rs.1, an ‘X’ is marked on the same column if the chart began with an ‘X’ mark for the beginning price level. A decrease in price equal to or above Rs. 1 is treated as a change in direction. The chartist shifts to the next column and marks a series of ‘0’s indicate the magnitude of fail m prices. No marking is made if prices remain at the same level or it changes are less than Rs.1. Prices are marked in the same column irrespective of the time period, as long as the direction of change remains unaltered.
Price Pattern
Share prices do not always switch from a bullish phase to a bearish phase, or vice-versa almost overnight. The transitional period which lies in between the two trends, throws up indications as to the direction of price change: The concept of price patterns is based on the invariable occurrence of a transitional phase; which shows up as an intermediate trend, in between two major trends.
According to the technical analysis, the transitional phase is marked by clearly discernable price patterns which signal (a) The end of a bull/ bear market, (b) The reversal in trend, (c) The magnitude and direction of the new trend and (d) Confirmation of the new trend.
Support & Resistance levels
A support level is a barrier to price decline, a resistance level is a barrier to price advancement. A stock breaking its support level is technically weak, conversely a stock breaking the resistance, level is technically strong.
This can be explained numerically say, for example, if a scrip price moves around Rs. 350 for some weeks, then it may rise and reach Rs. 450. At this point the price halts and then falls back. The scrip keeps on falling back to around its original price Rs. 350 and halts. Then it moves upward. In this case Rs. 450 becomes the support level. At this point, the scrip is cheap and investors buy it and demand makes the price move upward. Whereas Rs. 450 becomes the resistance level, the price is high and there would be selling pressure resulting in the decline of the price.
If the scrip price reverses the support level and moves downward, it means that the selling pressure has overcome the potential buying pressure, signaling the possibility of a further fall in the value of the scrip. It indicates the violation of the support level and bearish Market.
If the scrip penetrates the previous top and moves above, it is the violation of resistance level. At this point, buying pressure would be more than the selling pressure. If the scrip was to move above the double top or triple top formation, it indicates bullish market.
Head & Shoulders
This is the most important pattern to indicate a reversal of a price trend. As seen, head & shoulders has four basic elements:
- A strong rally (i.e. upward advance) on which trading volume becomes very heavy followed by a minor reaction (i.e. decline) on which volume runs considerably less. Thus left shoulder is formed.
- The other rally follows which takes the peak at a higher level than the left shoulder once again due to reaction, prices fall below the top level of the left shoulder as trading activity declines. The creates the lead.
- Subsequently, a moderate rally in the volume of shares traded lifts the price somewhat but fails to push it as high as the top of the head before once again decline sets in. Thus the right shoulder is formed.
- Finally, the price movement falls below the neckline (Which is the line joining the two points where the head & shoulder meet) which indicates a reversal. This is called confirmation or breakout. The drop in price is expected to be equal to the distance between the top of the head & the neckline. Thus a breakout indicates emergence of a bearish market.
Inverted Head & Shoulders: An inverted head & shoulders formation looks like an upside own head and shoulders formation. If there is a breakout (i.e., the price cuts the neckline after the second inverted shoulder is formed) it indicates a bullish market and signal to buy.
Tops and bottoms
Top and bottom formation is interesting to watch but what is more important, is the middle portion of it. The investor has to buy after uptrend has started and exit before the top is reached. Generally tops and bottoms are formed at the, beginning or end of the new trends. The reversal from the tops and bottoms indicate sell and buy signals.
Double Top and Bottom
This type of formation signals the end of one trend and the beginning of another. If the double top is formed when a stock price rises to a certain level, falls rapidly, again stock price rises to a certain level, falls rapidly, again rises to the same height or more, and turns down. Its pattern resembles the letter ‘M’. The double top may indicate the onset of the bear market.
But the results should be confirmed with volume and trend. In a double bottom, the price of the stock falls to a certain level and increase with diminishing activity. Then it falls again to the same or to a lower price and turns up to a higher level. The double bottom resembles the letter ‘W’. Technical analysis view double bottom as a sign for bull market.
Triple Tops and Bottoms
Triple tops and triple bottoms are another type of reversal chart pattern in chart analysis. These are not as prevalent in charts as head and shoulders and double tops and bottoms, but they act in a similar fashion. These two chart patterns are formed when the price movement tests a level of support or resistance three times and is unable to break through; this signals a reversal of the prior trend.
Confusion can form with triple tops and bottoms during the formation of the pattern because they can look similar to other chart patterns. After the first two support/resistance tests are formed in the price movement, the pattern will look like a double top or bottom, which could lead a chartist to enter a reversal position too soon.
Triangle formation
There are two types of triangle formation-Symmetrical and Right angled. The symmetrical triangle is a pattern in which two trendlines converge toward each other. A symmetrical triangle is formed when in a series of rallies, each succeeding one peaks at a lower level than the preceding peaks and the bottoms of the intervening relations is progressively higher.
This pattern is neutral in that a breakout to the upside or downside is a confirmation of a trend in that direction. When price break out of a symmetrical triangle, the reversal is generally sharp. Volume reduces as the triangle narrows towards the apex. A right angles triangle is also formed when a series of rallies coverage, but with an important difference one of the two boundaries of the series is horizontal to the X axis.
In an ascending triangle, the upper trend line is flat, while the bottom trend line is upward sloping. This is generally thought of as a bullish pattern in which chartists look for an upside breakout. In a descending triangle, the lower trend line is flat and the upper trend line is descending. This is generally seen as a bearish pattern where chartists look for a downside breakout. The validity of the breakout is measured by drawing a line parallel to the sloping side of triangle.
Rectangles
A rectangle is an important consolidation pattern, which can be formed either during an uptrend or in the course of a downtrend in prices. A series of minor raffles and reactions, which have almost identical peaks and troughs signal the formation of a rectangle.
A rectangle indicates equal pressure being exercised by buyers and sellers, and they are indecision areas that are usually resolved in the direction of the trend until a breakout occurs. The price line may breakout on either side. A rectangle therefore may be a consolidation pattern or result in reversal.
Flags & Pennants
Formations commonly known as flags & pennants often appear after a swift upward movement of prices followed by a generally sideways price movement.
This pattern is then completed upon another sharp price movement in the same direction as the move that started the trend. A series of flags in a rising market shows that the market may not come down sharply & vice-versa. There is little difference between a pennant and a flag. The main difference between these price movements can be seen in the middle section of the chart pattern.
In a pennant, the middle section is characterized by converging trend lines, much like what is seen in a symmetrical triangle. The middle section on the flag pattern, on the other hand, shows a channel pattern, with no convergence between the trend lines. In both cases, the trend is expected to continue when the price moves above the upper trend line.
Saucers and Rounding Tops
A saucer generally occurs at market bottoms when investor interest in the share is at its lowest, ebb. The lows reached at the end of the market are all formed by reactions that are small, and rallies are not marked enough due to lack of enthusiasm.
A rounding top is exactly opposite to a saucer, but volume characteristics are same for both the patterns A rounding top is formed to indicate a slow change in the demand supply balance, and is an important reversal pattern.
Gaps
A gap in a chart is an empty space between a trading period and the following trading period. This occurs when there is a large difference in prices between two sequential trading periods. Gaps indicate enthusiastic buying or selling and serve as a very powerful trend-validating tool. Gaps are typically seen on daily bar graphs and are very rare in weekly and monthly charts.
That is because gaps are usually “filled” when the price comes back and retraces the whole range of the gap. There are the rare circumstances when the gap will not be filled. There are three main types of gaps, breakaway, runaway (measuring) and exhaustion.
Breakaway Gaps
Fig Gaps chart Breakaway gaps typically come about at the beginning of the trend. They are usually seen following intermediate- to longer-term reversal patterns and serve to signal a rush to buy or sell a security. The types of gaps that occasionally are not filled are most often breakaway gaps.
Runaway or Continuation Gaps
Runaway gaps usually show up after the trend has been established. They typically come about in rapid advancing (or declining) markets where investor optimism (or pessimism) is running high. Also known as measuring gaps, they usually mark the midpoint between the previous breakout and the ultimate target of the move. They are typically filled in a matter of a few days, and those that aren’t usually are filled sometime later during larger corrective phases.
Most often, there is only one runaway gap, and it usually denotes the prevailing trend’s midpoint. There are times, though, that more than one runaway gap develops. They certainly serve to bolster the short-term strength of the move, but the more runaway gaps there are, the more suspect the duration of the move becomes.
Exhaustion Gaps
When exhaustion gaps develop, they tend to signal the ending phase of the prevailing trend. The most reliable way of distinguishing an exhaustion gap from just another runaway gap is by its volume. The volume associated with exhaustion gaps is usually significantly larger than that related to previous gaps. Exhaustion gaps do not, of themselves, indicate a trend reversal. They only serve as a warning that a significant trend change might be developing.
Island Reversals
Islands are compact trading ranges that usually follow a fast rally or decline. They are separated from the previous move by an exhaustion gap, and from the move in the opposite direction which follows by a breakaway gap. The resulting formation is an island of prices, detached from the rest of the price pattern by a gap on either end. Sometimes the island contains only one day and is called a one-day reversal.
The two gaps often occur at approximately the same price level. Island reversals do not usually carry long-term implications, but they can be very powerful short and intermediate term trading signals. An island will usually send prices back for a complete retracement of the move that preceded it.
Relative Strength
The empirical evidence Shows that certain stocks perform better than other stocks in a given market environment and that this behavior will remain relatively constant over time. This approach is based on a belief that a share or sector which is outperforming the market will probably continue to do so. It embodies the ‘momentum idea’ or band wagon effect’.
It may also reflect the-gradual dissemination of good or bad news to a progressively wider investing public. The technical analyst using the relative strength approach have observed that those firms and industries displaying greatest relative strength in good markets (bull) also show the greatest weakness in bad markets (bear). These ‘relatively strong’ firms will have high betas.
Moving Averages (MA)
The moving average is one of the most popular indicators and is used by technical analysts for a variety of tasks:
- to identify areas of short term support/resistance
- to determine the current trend
- as a component in many other indicators such as the MACD, or Bollinger bands.
The main advantages of moving averages is firstly that they smooth the data and thus provide a clearer visual picture of the current trend and secondly, that moving average signals can give a precise answer as to what the trend is. The main disadvantage is that they are lagging rather than leading indicators.
There are two main forms of moving average:
The simple moving average (as the name suggests) calculates the average price over a specified moving time period. For example, a 20 day simple moving average will calculate the average mean price from the last twenty days closing prices and so on. Generally 50 day and 200 day SMA is used in predicting future prices.
The exponential moving average (“ema”) also averages the last x days closes but assigns a greater weight to the more recent prices making it more sensitive to current price action and thus reducing the lag effect.
Spreads
Large spreads between yields indicate low confidence and are bearish; the market appears to require a large compensation for business, financial and inflation risks. Small spreads indicate high confidence and are bullish In short, the larger the spreads, the lower the ratio and the less the confidence. The smaller the spreads, the greater the ratio, indicating greater confidence.
Market Breadth Index
Market Breadth is a comparison of advancing stocks versus declining stocks. Positive breadth indicates that more stocks are advancing than declining. Negative breadth indicates that more stocks are declining than advancing. Breadth can also be thought of as a measure of momentum for groups of stocks.
The figure of each week is added to the previous week’s figure. These data are then plotted to establish the pattern of movement of advance and declines. The purpose of the market breadth index is to indicate whether a confirmation of some index has occurred. If both the stock index and the market breadth index increase, the market is bullish; when the stock index increase but the breadth index does not, the market is bearish.
Disadvantages of Technical Analysis
Following are the disadvantages of technical analysis:
- Difficulty in Interpretation
- Frequent Changes in Stock Prices
- Unreliable Changes
- Changes are not predictable
Difficulty in Interpretation
Technical analysis is not as simple as it appears to be. While the charts are fascinating to look at, interpreting them correctly is very difficult. It is always easy to interpret the charts long after actual point of time. As such, fundamentals argue that charting techniques are no different from palmistry.
Frequent Changes in Stock Prices
With changes in market, chart patterns keep on changing. Accordingly, technical analysts change their opinions about a particular investment very frequently. One day they put up a buy signal. A couple of weeks later, they see a change pattern and put up a sell signal.
Unreliable Changes
Changes in market behaviour observed and studied by technical analyst may not always be reliable owing to ignorance or intelligence or manipulative tendencies of some participants.
A false piece of information or wrong judgment may result in trade at a lower than market price. If the technicians fail to wait for confirmation, they incur losses.
The market prices of shares are sometimes the results of certain unhealthy practices like cornering and rigging of certain shares by some-stock market operators.
Changes are not predictable
Technicians expect changes to take place in a known and gradual fashion.
- History does not repeat itself: One of the major limitations of technical analysis is that the entire data is based on the past. It is presumed that future resembles the past. There is no guarantee that history repeats itself. Systems become more sophisticated and people become more mature, effecting a different of behaviour.
Further, unexpected events like a change of the government, or a violent agitation or a natural calamity may produce a different pattern of behaviour. This contingency is not taken into account in making projections. - No gradual shifts: It is presumed that shifts in supply and demand occur gradually rather than instantaneously. Since these shifts are expected to continue as the price gradually reacts to new or other factors the price change pattern is extrapolated to. predict further price changes. However, economists asserted that this is a wrong proposition.
- Tools are not precise: The greatest limitation of technical analysis is perhaps the mechanical precision it gives to the entire exercise of investment in equity shares. However, the tools are subject to errors, breakdown and misinterpretation.
- False signals can occur: Technical analysis is a signaling device. Like a thermometer, it may give a false indication when there is no alarm, but when there is cause for alarm, the signal will almost invariably be flashed.
The hub of the problem as it applies to indicators is that while they may be crystal clear in definition and theory, they often break down in practice. Each one of them has at some particular time been ineffective, out-weighed by a number of other indicators.
Investing wisely is an important part of financial security. One tries to invest money as early as possible so that the money will grow accordingly in his/her lifetime. Choosing a wise investing option is very crucial because a balance is required to be maintained between the risks and returns involved.
For example, many people invest in private firms which offer very high interest rate but they may vanish after some time losing all the invested money.
Difference Between Technical Analysis and Fundamental Analysis
| Fundamental Analysis | Technical Analysis |
|---|---|
| Focuses on the economic forces of Demand & Supply that causes prices to move | Analysis using past data of Demand & Supply |
| Finding the intrinsic value of the market/asset | Study of historical graphs is stressed |
| Characteristics of a company is employed in the analysis | Identify a trend at a relatively early stage & ride on that trend until the weight of the evidence shows or proves that the trend has reversed |
| Effects of economic factors on a stock such as earning reports, cash flow, etc are concerned | Deals in probabilities, never certainties |
| Fundamental analysts try to establish long-term values. | Technical analysts try to predict short- term price movements |
| Investors, who invest on long-term basis, use the results of fundamental analysis. | Speculators, who want to make quick money, mostly use results of technical analysis |
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