Does the term technical analysis conjure up visions of bean counters, nerds, number crunchers? You know the type; the guy with 20 pencils and pens in his pocket with a pocket protector or maybe the classic nerd wearing taped together glasses. Looks great in the movies, but your typical technical analyst can be anyone from your next door neighbor to the soccer mom at all the soccer games.
Let’s get into exactly what kind of information can be gleaned by performing technical analysis of stocks.
What is a Technical Analysis?
Technical analysts believe that a stock’s price already reflects all the relevant information needed and that investors collectively are prone to repeating past investor behavior. Your typical technical analyst uses price charts to look for those repeating patterns in prices to identify trends in financial markets. When a trend is identified, analysts attempt to exploit those trends. The technical analysis bases projected volume and price off of moving averages, lines of support, resistance, balance days, and even flags and pennants. These items and other indicators, which are typically mathematical formulations of price or volume, help to determine if an asset is trending and if so, the direction; up or down.
What are the Objectives?
The objective of a technical analysis is to forecast trends in price and volume by recognizing and identifying chart patterns, thus reducing risk when buying or selling stocks. Fundamental analysis, on the other hand, analyzes financial data on the company, market, currency or commodity and is based more on the standing of the company. It’s common for traders, financial professionals, market makers, pit traders and active day traders to use technical analysis.
Although many academics dismiss technical analysis as pseudoscience, people who use technical analysis believe that it is an aid in identifying trading opportunities. Technical analysts believe that strong data and numbers are a more accurate predictor of future movement in markets.
There are good arguments for both types of market analysis. If you’re a number cruncher and like to deal with data, then you might enjoy technical analysis. Learning how to read and understand a technical analysis is beneficial to learning how to invest wisely in the stock market. Arm yourself with as much information as possible in order to relax and have fun with your investment.