1 Answers: What is Meant by Technical Analysis?
Question
I am in the process of analyzing different stocks and also bonds and even some private equity. And would like to know what is meant by technical analysis. I guess it is a type of counterpart to fundamental analysis?
What is Meant by Technical Analysis?
in progress
0
Investment Analysis
4 years
1 Answer
549 views
0
Answer ( 1 )
Technical Analysis is based on three assumptions.
#1. Market discounts everything. #2. Price moves in trends. #3. History tends to repeat itself.
Technical analysts only consider price movements and ignore the fundamental factors of a company.
The reason for this is that technicians assume that at any given time, a stock price reflects everything that has or could affect the company, including the fundamental factors.
They believe that the company’s fundamentals, as well as market psychology, are priced into the stock.
Therefore, there is no need to analyze the company itself.
Technicians believe in a concept called the efficient market hypothesis, which states that stock market efficiency reflects and incorporates all relevant information in a stock price.
So it basically goes against what Fundamental Analysts believe in.
In Technical Analysis, stock price movements are said to move in trends. That means that when a trend has been located, the future price will move in the same direction as the trend.
The last important idea of Technical Analysis is that history repeats itself. The “repetitivity” is due to market psychology. Market participants tend to provide a consistent reaction to similar market activities.
Technicians use chart patterns to analyze market movements and understand trends.
Technical versus Fundamental analysis. In a way, you could say that it’s like comparing financial statements versus charts.
A Fundamental Analyst tries to determine the intrinsic value of a company by looking at its statements and determining whether it is over- or undervalued.
Technicians believe analyzing a company’s financial statements is redundant as it is all accounted for in the stock price.
Therefore, they place the efficient market hypothesis at the top of their beliefs. Usually, Fundamental Analysis is used when you’re looking towards the long-term in a stock while technical analysis is used for short-term trading.
Even though they might seem contrary to each other, they can still both co-exist. It can actually give the trader or investor a higher chance of success as he or she can analyze both the long and short term of a stock.