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Stock Charts – The Golden Compass!
Why do we need to look at the stock charts before trading or investing in stock market? Generally, there are 2 broad categories of methods use to analyze stocks or options before making an investment decision: technical analysis (i.e. stock charts) and fundamental analysis. Technical analysis is a method to evaluate stocks (or even commodities, foreign exchange, future, etc) by analyzing the historical price and volume movement generated by market activity. Technical analysis is basically studying the stock charts that showing the supply and demand of a market in an attempt to determine what direction or trend will continue in the future. In other words, technical analysis attempts to understand the emotions of the mass market by studying the market itself which is revealed by stock charts, as opposed to fundamental analysis which involves analyzing the characteristics and components of a company in order to estimate its value. Personally, I combine both fundamental and technical analysis in my trading or investment decision. Technical charts are very helpful for me to decide the timing of entering and exiting a trade especially for momentum traders or day traders. Hence, it is important that we put some effort to learn some basic knowledge of technical analysis. Once we gain some understanding of technical analysis, it gives us a new set of tools or skills that will enable us to be better traders or investors. Let’s start off with… 3 Basic Assumptions of Technical Analysis:
1.The Market Discounts Everything A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors of the company. However, technicians or stock chartists assume that, at any given time, a stock's price reflects everything that has or could affect the company - including fundamental factors. Technical analysts believe that the company's fundamentals, along with broader economic factors and market psychology, are all priced into the stock. Consequently, this removes the need to actually consider fundamentals, market psychology or broader economic factors separately and leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market. 2. Price Moves in Trends In accordance to chart analysts, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption. 3. History Tends To Repeat Itself Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of the price movement. The repetitive nature of price movements is attributed to market psychology. In other words, market participants tend to provide a consistent reaction to similar market condition or sentiment over time. Chart technicians use chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.
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