Technical Analysis Is The Study Of Stock Behavior Patterns
Technical analysis in terms of stock trading and brokerage refers to research and examination of the market trend and security aspects, with reference to supply and demand of a stock in the market. Ordinarily, the Technical Analyst uses charts and different computer software to identify and analyse the price trends in the market, vis-à-vis the supply and demand. The basic subjects of the analysis and study are the movements and trading volumes to determine the stock behaviour patterns. Such patterns may be Head and Shoulder Formation, Cup and Saucer, Double Top, Double Bottom or W Formation. These terms may sound obscure but are well known by technical analysts, also known as "chartists".
Apart from the above indicators, there are other indicators like the support and resistance level, and the moving averages ( MA ). The analyst will take stock of all the support available for the particular market trend, and the resistance faced by it, so as to strike a balanced assessment. Technical Analysis is in contrast with the system of Fundamental Analysis, but some people effectively use aspects of both to trade and invest in stock. The Fundamental Analysis is predominantly related to the financial data of a Company or organisation. Technical Analysis on the other hand does not take into consideration a Company's financial data. Moreover pure technical analysts disregard such data as it is argued that it is already factored into the chart.
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The primary aspect of stock trading, with which a Technical Analyst is concerned, is the support level. It is the lower level of a security's trading range. At this level the buying pressure tends to bid up the price of the security. It means that, when this level is reached, the price stops falling any further, the reason being, that at this point the demand for the security is much more than the supply. Whenever the price of the security goes below the support level, the analyst will not recommend any investment on that stock. Traders will often sell on support breaks as the price will then often fall back down to the next lower support level if it exists.
Just as the support level is the lowest limit, below which the price is expected not fall, the resistance level is the mark beyond which the price is not expected to rise. A rise above such a level is known as a "Technical Breakout" which results in renewed buying. Any supply beyond this level will result in the decline in the price instead of any further rise, since the demand becomes static after this level without continued buying. For example, if the price of share of a particular company is £5 at the lowest level support, and £10 at the highest "resistance", then the support level is £5 and resistance level is £10. Falls below £5 could trigger big sell-offs. Rises above £10 could result in massive breakouts since the stock market bulls of that stock have won the tussle with the bears ( people negative on the stock ). Moving average is the average that takes into account the prices of the security or the commodity over a specific period of time. The average shows the trend of the latest period. The specific period may range from a few days to a few years. The average is ordinarily a rolling average. Generally the latest days figures are included, and the oldest day's figures are not taken into consideration while determining the moving average ( i.e. a moving average is over a given timeframe. 10, 20 and 50 day moving averages are commonly used ). Moving Average Convergence/Divergence (MACD) is one of the simplest yet very reliable indicators. This was developed by Gerald Appel. MACD uses moving averages to include some trend following attribute. In this case the moving averages are lagging indicators. You will subtract the longer moving average from the shorter ones, and the result will be a line, that would oscillate above and below the zero level. It has no upper or lower limits. MACD is basically a centered oscillator. It also acts as the guidelines for the centered oscillators. By combining two Fibonacci quasi periodic structures to form a hetero-structure, a broad omni-directional band is obtained. The parameters used are Fibonacci quasi periodic sub structures, and periodic substructures. This helps in creating a one dimensional quasi periodic crystal structure. Fortunately you don't need to know quantum physics or fully understand that statement to use Fibonacci for trading purposes or technical analysis.
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