Technical Analysis

There are numerous types of analytical methods used in the universe of investing. The purpose of this post is to provide a basic description of technical analysis. Please keep in mind that this post is not designed to be complete in all material respects. It is being provided for educational purposes only and should not be relied upon as legal or financial advice. If you have any questions relative to the contents hereof, you should seek qualified professional advice.

Technical analysis is the exact opposite of fundamental analysis. Technical analysts select stocks by analyzing statistics generated by past market activity, prices and volumes. Based upon this type of information, technical analysts make inferences about the future movement of stock prices.

John Murphy, a renowned technical analyst, in his book “Charting Made Easy” explains the theory:

“Chart analysis is the study of market action, using price charts, to forecast future price direction. The cornerstone of the technical philosophy is the belief that all factors that influence market price — fundamental information, political events, natural disasters and psychological factors — are quickly discounted in market activity. In other words, the impact of these external factors will quickly show up in some form of price movement, either up or down.”

Two important concepts associated with technical analysis are “support” and “resistance.” These are the stock price levels at which technicians expect a stock to start increasing after a decline (support), or to begin decreasing after an increase (resistance). Trades are generally entered around these important levels because they indicate the way in which a stock will bounce.

Note: Most technical analysts are usually very active in their trading. Stocks are normally held for very short periods of time taking advantage of small fluctuations in stock prices, whether up or down.

If you decide to look into utilizing this type of trading strategy, you will find that there are literally hundreds of indicators and chart patterns used for picking stocks. However, it is important to remember that no one indicator or chart pattern is infallible or absolute.