Introduction to Technical Analysis |
The fundamental and technical analyses are the most common methodologies used by financial analysts for forecasting the stock market. Among most widespread technical analysis techniques utilized by traders are the technical indicators and stock chart analysis. The technical analysis is not a method of predicting the future, but rather statistical approach to analyzing how the human emotion and market psychology influence the stock market. We have to accept that the stock market price is driven not only by fundamentals. It reflects the human expectations about the future price.
Price movement represents the human emotions - greed, fear, panic and hysteria. While not trying to predict the future facts, technical analysis measures the market sentiments and allows to set-up the highest probability entry and exit points. The technical analysis provides trading techniques for identifying buying opportunity, adds discipline to your trading, stops emotional trading and allows controlling downside risk.
The mass psychology is the underlying principle behind all technical indicators and chart analysis. There are many schools and techniques of technical analysis. Many traders combine several techniques from more than one school and use them to confirm signals from each other.
Technical indicators are the result of mathematical calculation, based on the price movement. They include leading and lagging technical indicators. The leading technical indicators designed to generate signals ahead of the price movement. Among the most popular leading technical indicators are momentum oscillators.
Momentum indicators measure the rate of change of the stock's price. They identify the overbought and the oversold market conditions. The main benefit of the leading indicators is the earlier signals for entry and exit points.
The leading or trend following technical indicators follow the price movement and designed to provide a trend change confirmation signal. The leading technical indicators provide the best trading signals in the trading market while the lagging indicators are best used in the trending market.
The stock chart analysis presents various different trading tools and techniques; based on assumption that the price movement is not totally random, price trends and the history repeat themselves. The most popular techniques include trend lines, support and resistance, chart patterns and candlestick patterns.
The stock chart pattern interpretation is often depends on the parent's pattern and technical indicators. The main purpose of the chart analysis is to identify the pattern as earlier as possible and trade accordingly. Chart analysis could provide the most accurate trading signals.
It is the most rewarding strategy to combine chart analysis and technical indicators based on different data, time frames and approaches to compliment each other. The trading signals are more reliable when confirmed by different technical analysis techniques. |
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