In stock investing, the two main methods commonly used by investors to analyze and make stock investment decisions are fundamental analysis and technical analysis.
Fundamental analysis is a method that focuses on looking at a company’s business information and reports to determine the intrinsic value of a security, technical analysis is a method that focuses on price analysis and stock price movements to make investment decisions.
In this article, I present some basic knowledge of technical analysis methods, as follows:
1. Technical analysis.
Technical analysis is a method of studying the statistics of past price movements and volume to evaluate securities and predict future price trends. Technical analysis does not consider stock value as the primary motive for buying or selling a stock. Technical analysts will use indicators and charts to look at how the supply and demand movements of a stock affect future price trends. From there, investors will determine the trend and decide when to buy, hold, or sell stocks in the future.
Technical analysis investors mainly use charts and do not often refer to the financial and business situation of the company. This method is often used to identify short-term trading signals, but can also assess a stock’s strengths and weaknesses relative to its competitors or to the overall market.
2. Advantages and disadvantages of technical analysis methods.
– Technical analysis with high accuracy helps investors easily determine when to buy or sell. Indicators and technical models are built and developed by experienced experts so that investors can use this method to set up appropriate and fast trading orders.
– Market price movements often precede fundamental analysis. By focusing on price action, technical analysts will be able to predict future prices sooner than fundamental analysis.
– Technical chart analysis can help identify support and resistance levels. These levels are usually determined by the length of time the price has traded within a certain range.
– Not all technical models and signals work as expected.
– Technical analysis does not detect other influencing factors affecting stock prices. In a highly volatile market, the risk is high because the results are likely to be slower than the actual news.
– Technical analysis depends on individual investors’ analysis and evaluation.
3. Basic Assumptions of Technical Analysis.
Each method of analysis has basic assumptions. That means the analyst believes these assumptions to be true and relies on these assumptions to make price conclusions.
Professional analysts typically analyze according to three general assumptions:
The efficient market hypothesis:
Analysts believe that all company information and market sentiment factors are already reflected in the stock price. Therefore, it is not possible to invest effectively based on known information or past price movements.
Prices go up and down according to specific trends:
Technical analysts expect that price, even during random market movements, will show a trend at any given time. In a nutshell, instead of erratic volatility, stock prices are more likely to continue moving in the direction of past trends. Most technical trading strategies are based on this assumption.
History tends to repeat itself:
Technical analysts believe that history tends to repeat itself. This repetitive nature is often attributed to market sentiment, which is often very predictable based on investor emotions such as fear or excitement. Analysts use chart patterns to analyze these emotions and subsequent market movements to understand trends and predict future trends.
4. Tools commonly used by technical analysts.
The core principle of technical analysis is that a stock’s price will reflect all information that can affect the market. Usually, analysts will use two main tools, price patterns, and technical indicators, to analyze price movements.
Price patterns are used by analysts to identify support and resistance levels.
A support level is the lowest price range in a period of time where a security’s price falls to that price range and tends to rise again.
A resistance level is the highest price range in a period of time when a security’s price rises to that price range and tends to fall again.
When the price slips below the support, volume is expected to increase with the price possibly falling sharply, marking the start of a new downtrend.
When the price breaks through resistance, expect volume to increase with a possible price increase, marking the start of a new uptrend.
These patterns are designed to predict where the price will be, after a certain time and when a certain price point is broken.
The model shows that in each period of time, the trading price only fluctuates within a certain range, the line connecting the tops of the price zone determines the resistance level and the line connecting the bottoms of the price area determines the support level.
Technical indicators are formulas that calculate or forecast prices based on historical parameters such as price, volume, or demand for a stock.
These indicators are used by traders following technical analysis to make investment decisions.
There are many technical indicators developed by researchers to support trading. Some indicators focus primarily on identifying market trends, including support and resistance levels. Some other indicators focus on determining trend strength and likely continuation.
5. Several schools of technical analysis.
There are many schools of technical analysis alone or in combination, but some of the more popular ones are listed below:
- Dow theory technique.
- Candlestick charting techniques.
- Price chart pattern technique.
- Trendline technique.
- The Elliott wave principle technique.
- The Fibonacci sequence technique.
- Pivot point technique.
- Technical indicator system.
- The Wyckoff technique.
Above are some of the most basic contents about technical analysis in stock investment. The method of technical analysis in stock investment is often used by short-term investors to determine the point of buying and selling stocks. is often used by short-term investors to determine buying and selling points for stocks. To increase investment efficiency, some investors often combine technical analysis with fundamental analysis to make investment decisions. Typically, investors use fundamental analysis to decide on a portfolio, and technical analysis to decide when to buy.