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| Technical analysis does not try to analyze the financial data of a company such as cashflow, dividends and projection of future dividends. That type of analysis is called ]. | Technical analysis does not try to analyze the financial data of a company such as cashflow, dividends and projection of future dividends. That type of analysis is called ]. | ||
| Technical analysis implicitly |
Technical analysis implicitly rejects the efficiency of the markets as understood in the ]. The efficient markets theories basically argue that existing prices reflect all available information, and that future price movements will follow a path that will approximate to a random walk (Brownian motion) as they adjust to new information as it emerges. The theories further assume that all participants in the stock market have equal and instantaneous access to all information that might affect stocks. Technical analysts or chartists believe that by analysing stock price histories they can discern sufficient information about the thinking of buyers and sellers to anticipate future events. That is, they assume that there is useful information to be gleaned, i.e. hidden within, price histories; that it is a way of analyzing the past actions of people in a particular market as reflected by their actual transactions. | ||
| While technical analysis is widely used (if only as one input among many) by both professional and amateur traders as a means of predicting future market moves, it is generally not used by economists in any academic sense. | While technical analysis is widely used (if only as one input among many) by both professional and amateur traders as a means of predicting future market moves, it is generally not used by economists in any academic sense. | ||
Revision as of 16:53, 4 October 2003
Charting or technical analysis is the use of numerical series generated by market activity, such as price and volume, to predict future trends in that market. The techniques can be applied to any market with a comprehensive price history.
Technical analysis does not try to analyze the financial data of a company such as cashflow, dividends and projection of future dividends. That type of analysis is called fundamental analysis.
Technical analysis implicitly rejects the efficiency of the markets as understood in the efficient market hypothesis. The efficient markets theories basically argue that existing prices reflect all available information, and that future price movements will follow a path that will approximate to a random walk (Brownian motion) as they adjust to new information as it emerges. The theories further assume that all participants in the stock market have equal and instantaneous access to all information that might affect stocks. Technical analysts or chartists believe that by analysing stock price histories they can discern sufficient information about the thinking of buyers and sellers to anticipate future events. That is, they assume that there is useful information to be gleaned, i.e. hidden within, price histories; that it is a way of analyzing the past actions of people in a particular market as reflected by their actual transactions.
While technical analysis is widely used (if only as one input among many) by both professional and amateur traders as a means of predicting future market moves, it is generally not used by economists in any academic sense.
Techniques of Technical Analysts
The traditional chartists developed familiarity with chart patterns that seemed to recur repeatedly and gave some of them names e.g. "head and shoulders" or "flag" or "triangle". They believed that they could infer probabilities of price action from studying the patterns. More recent technical analysts use a wide variety of techniques but, at their best, their methods approximate more closely to a statistical analysis of price action. For example J.M.Hurst (see below) used sophisticated techniques (fourier analysis) to search for meaningful signals amongst the apparent random noise of stock price movements. The most sophisticated technical analysis software allows the user to design indicators and to optimise them by testing their profitability (assuming trading rules and transactions costs) using historic data; trading stratagems can be designed that utilise one or more such indicators.
Some of the techniques used and patterns found include:
- Support level - a level below which the price will not likely fall.
- Resistence level - a level above which the price will not likely rise.
- Breakout - when a stock rises above its resistence level or below it's support level.
- Trend line - a regression line that predicts future prices based on past prices.
- Trend line penetration - when a price crosses Bollinger bands or some other measure of the range of standard deviation of the trend line.
- Moving Averages -
- Momentum -
- Commodity Channel Indicator -
- Relative strength -
- Bollinger bands -
- Gann lines and Gann angles -
- Triangle -
- Ascending bottom -
- Broadening foundation -
- Head and shoulders -
- Inverse head and shoulders -
- Triple top -
See Also:
Finding related topics
- list of finance topics
- list of accounting topics
- list of management topics
- list of human resource management topics
- list of marketing topics
- list of economics topics
- list of information technology management topics
- list of production topics
- list of business law topics
- list of business ethics, political economy, and philosophy of business topics
- list of business theorists
- list of economists
- list of corporate leaders
- list of companies
Further reading
- Technical Analysis of Futures Markets, John J. Murphy, New York Institute of Finance, 1986, ISBN 0-13-898008-X
- The Profit Magic of Stock Transaction Timing, J.M. Hurst, Prentice-Hall, 1970.