Technical Analysis

The study of charts in order to predict the future movement of prices is termed as the Technical analysis. People who conduct such studies are known as technical analysts who analyse factors like the historic market data, mostly volume and price.

Since historical prices are placed in different types of charts that are the main source of information for the technical analysts, these people are also called as “chartists”. It is to be mentioned that the underlying business model of a firm is not any concern for a technical analyst. It is the price history of the company, volume and their indicators (the ones that gives the signal whether to buy or sell), that are the most import areas of concentration for the analysts. This is what allows a technical analyst to remain protected from the hype of a company as well as reduces the level of confusion which can block his/her judgement.

Fundamental Analysis- Things that you should know

It is to be mentioned that the fundamental analysis (the analysis of the financial statement and industry growth rates of a firm along with the analysis of its competitors) is mainly conducted on the basis of company information available on public. This is why the technical analysts claim that having access to the fundamentals of a particular company is not going to be good enough for an investor to gain competitive advantage over other investors.

In other words, it can be said that the fundamentals of a firm is more like common knowledge which is applied by the traders in order to trade its shares and these information has already been factored into the price if that firm’s stock. This is why when it comes to valuation, a technical analyst sets his/her eyes on the share price instead of putting too much emphasise on factors like the calculation of return on equity (ROE) of a certain share, price earning/ratio etc. The technical analysts consider the supply and demand factors as well as the market sentiment as the major factors that drive the price of the shares. And all these information are included in the chart.

Technical Analysis Predicts Trader's Decisions?

It is also thought (by the analysts) that the moves that will be taken by the trader are fairly predictable. They follow the patterns of behaviours like greed and emotion (which plays a vital role to dictate the psychology of a trader) at a regular basis. Say for example, often the investors are found gobbling up the shares of a particular company when it comes up with vital announcements and one of the key reasons behind this type of behaviour is that other traders are also doing the same thing.

The study conducted by Brad M Barber and Terrance Odean during November 2006 (at the University of California) shows that traders have the tendency to act in patterns. Like going after the stocks that are grabbing more attention or dumping the stocks of a certain company and so on. Considering the fact that there are too many options in the stock exchange to choose from with traders having a limited amount of capital, traders usually keep their eyes on the ones that have caught their attention lately. The study revealed that such behaviours does not enhance the returns for the traders but instead plays an adverse role.

The technical analysis usually use certain patterns of price behaviour (created by the investors who react in a similar way in response to the market stimuli) to chart the time line of entry and exit of the investors for a certain stock.

For instance, let’s assume that a super fund has started purchasing a large number of shares of a company over a certain period of time (say for a week). The main goal of a technical analyst is to pinpoint specific activities that might result extreme movements of price. And this is why the activities of that particular super fund should be considered very much important for a smart technician.