When you are interested in buying and selling stocks to make some profits from your saved money through investment, you need to know how stock market works. There is a lot going on in the stock market at all times. A few things are easy to understand but some can be complex too. A basic understanding of price and volume can tell you everything that happens in the stock market but predicting the movements requires more knowledge than just basic. That’s when the technical analysis of stocks jumps in. Technical analysis is no rocket science but it is not plain and simple at the same time.
Most new traders in the stock market would believe that the position of a company and its latest status is what defines the value of its stock and shares. While this is true but this is only fundamental analysis of the market. There are many more factors that affect the price of a stock and the condition of the company is just one of them. Furthermore, knowing the status of a company, corporation or organization tells only the current trends in the market but the tiny microscopic movements in the price are completely ignored in these fundamental analyses.
Technical analysts wouldn’t pay any attention to how a company is performing at any given moment. Their main focus is on the price, the past performance of the price and volume, supply and demand, and the trends in the prices of the stocks. Technical analysts are often criticized for focusing too much on the price of stocks. However, technical analysts, sometimes also referred to as chartists, believe that the price of any stock at any point in time tells the whole story about everything and every factor that’s affecting the price and will affect it in future.
Since analysts believe that the price of a stock tells the story of all the factors affecting the value of a stock in the market, they only need to focus on the price movements. They take into account the past movements in the price, repeating trends, resistance, momentum etc. While a fundamental might see price movements as completely random, the chartist believes that certain patterns repeat in the price of a stock and based on these repeating trends the future movement of the stock can be predicted. Lastly, the focus of the technical analysts remains on “what” rather than “why”.
Technical analysts use various tools in order to help them in recognizing and pointing out the patterns in the price movements. Despite the efficacy of technical analysis tools, volume remains a major determining factor in predicting the future movement of a stock. In simple words, whatever the price movements are of a particular stock at a given time, the change in volume decides at that time whether or not the trend will last. Some of the most commonly used useful technical analysis tools are On-Balance Volume, Accumulation Line, Aroon Indicator, Average Directional Index, MACD (moving average convergence divergence) and stochastic oscillator.
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