Technical Analysis - A Basic Guide

Technical analysis is an analysis tool used in determining the stock market situation. This financial analysis tool aids in determining the direction of stock price by comparing the past market data and volume of transactions. It becomes important for an investor of stock options to study and understand the stock market position in order to make decisions on investments. Hence, technical analysis is used as a tool for finding the trends of the stock market.

Characteristics of Technical Analysis

Technical analysis is one of the two analysis methods used for understanding the position of stock market. It is concerned only with the movement of the price and not the value of the stock of an individual company. In other words, it can be called as an analysis that studies the demand and supply in the stock market.

Price Charts

It is one of the tools employed for technical analysis and is much similar to scientific or business charts. It is a graphical method of plotting a series of prices over a particular period of time. It is drawn by plotting the closing price of the stock exchange every day for a set time period, say a year. Thus by looking at this price chart, one can clearly understand the direction of stock prices.

Support vs. Resistance Lines

Apart from the commonly used price chart tool, support vs resistance lines are also used for studying the trends in the stock market. It basically is a tool to understand the tussle going on between the bulls (buyers) and bears (sellers).  In simpler terms these lines can show the relation between the demand and supply in a stock market. Support line and resistance lines are fixed based on the value of the price which is seldom crossed by the closing prices.

Support line is the line showing a price level, which a stock market price seldom fails to reach and resistance is the line drawn at the price level, which the stock market seldom crosses or exceeds. If the stock market prices fall in between these 2 lines it is said to be stable, otherwise it is said to be a trend change, which needs time to get stabilized. Stability period is more suitable for investment.

Technical Indicators

Technical indicators are the various calculations done with volatility, trend, flow of money and momentum in the market. Such indicators give additional information for technical analysis. Leading and lagging are the 2 indicators used for finding the price movement. Oscillator is another indicator that shows whether the price is falling within a range.

Importance of Technical Analysis

Short term investors, day traders and hedgers rely on the results given by technical analysis to make decisions on investment. These traders and investors use the technical analysis with fundamental analysis to have a clear understanding of the stock market so that they can make wise decision.

Final Word

You can invest your hard earned money in appropriate financial investment instruments to get good returns on your investment. If your option of investment is stocks and stock options, it is better to understand and use the technical analysis.

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