Ihab Salloum[ad_1]
Introduction
Technical Analysis is basically the process of analyzing past price movements to predict future price movements. It is not an exact science and it cannot produce reliable results every time. However, it can be a useful tool when making trading decisions.
Example # 1
Let’s say you pull up a chart for Microsoft (MSFT) and you notice that there seems to be a pattern where the price goes up to a peak about once a month. You may decide to wait till it drops to a valley to buy in, and then sell when it hopefully reaches another similar peak.
Example # 2
Pretend that Google’s (GOOG) daily trading volume has doubled this month. How long can that continue? Perhaps too many people bought too many shares too fast and you think the resulting higher price cannot sustain itself for much longer. In this case you might want to short sell, hoping the price will come back down soon.
How It Works
You can always find a pattern in a chart but it does not necessarily mean anything. Sometimes, though, there is a pattern that is based on repeatable human behavior or periodic economic cycles. Other patterns might be based on too many people buying (or selling) at the same time, causing an overbought (or oversold) condition. These are the kinds of patterns you want to look for because they are based on real situations and not just a funny shape on the chart.
Common Indicators
Regular Price Charts:
— Look for classic price patterns.
Volume Charts:
— Look for overbought and oversold conditions.
SMA – Simple Moving Average:
— Gives a smooth, simply-averaged price chart to more easily see price movement.
EMA – Exponential Moving Average:
— A moving average price chart which gives more weight to recent prices.
RSI – Relative Strength Indicator:
— A simple chart indicating overbought and oversold conditions. It is based on whether closing prices were up or down on previous days.
MACD – Moving Average Convergence / Divergence:
— Measures price trends by comparing fast and slow EMA’s.
Bollinger Bands:
— Wraps an envelope around a price chart, showing possible price ranges based on past price volatility.
Market Sentiment
Traders also like to use research data showing sentiment about the market or individual companies. That could indicate whether more people will be buying or selling, which could definitely indicate the price direction.
Fundamental Analysis
Fundamental Analysis is a close cousin to Technical Analysis. Some traders use one or the other but some use both in their trading decisions. It is the analysis of a company’s actual financial health, which should actually be more accurate than T.A. but the market is not always a logical creature!
Where to Find the Tools
Most financial websites and brokerages provide some sort of Technical Analysis tools with their charts. One example is Yahoo! Finance.
Caution / Disclaimer
It is important to reiterate that fact that T.A. cannot predict the future with any certainty.
Not all people believe in it. In fact, many academic researchers say it does not work at all, that any chart patterns found are simply random movements. The fact is, past history can never predict future prices. A chart does not know what a company will do in the future or how global economic news will affect prices. So please use the analysis as a supplementary tool only.
[ad_2]
