Friday, March 21, 2008

Technical Analysis: Using the Past to Forecast the Future

Technical analysis is an analytical system that looks for buy and sell signals in patterns formed in charts of stock prices. A strict technical analyst wouldn’t do any business or financial analysis, instead preferring to look only at the charts. A different approach, favored by many small cap investors, is to do the fundamental business and financial analysis first, then use technical analysis to look for good places to buy and sell the stock.

Technical analysis utilizes the research of historical price activity and the application of momentum studies to provide a picture of where the market has been, and to help forecast where the market might be headed.

So-called Japanese candlestick charting methods date back some 300 years, and were first used to help analyze market direction for rice trading. Basic western style charts for decades have been constructed to display price action, but the application of technical analysis for trading purposes has been widely accepted only since about the early 1980s. Before then, many fundamental analysts dismissed technical analysis research as little more than “voodoo.” At that time, the use of technical analysis was not widely embraced by the investment community and was basically ignored by the financial press. Throughout the late 1980s and into the 1990s forward to today, it became apparent to many investors that technical analysis offered vital market information, and as a wave of chart-driven money managers entered the marketplace, technical analysis gained in importance. Today nearly every major market research firm in the world now includes technical analysis study within their cache of work.

Technical analysis is valuable because it provides a tool to help explain investor behavior. Technical analysis generates a visual mechanism to understand price movement,and it helps to level the playing field for those not privy to fundamental insider information.

Market technicians believe that technical analysis research can provide clues to understanding how investors behave toward a stock or toward the market in general. Once armed with a feel for some basic momentum studies and chart patterns, market technicians believe they can better understand why a market can suddenly reverse course and stall out on a trend.

Humans are visual animals, and there is a reason for the adage, “a picture is worth a thousand words.” When novices look at a price chart, they often see only a plot of points connected on a graph; to an experienced technical analyst, that chart comes alive to tell a story of triumph, defeat, sudden twists and surprising turns. And experienced technical analysts can interpret that information to make knowledgeable guesses about the next move.

In fact, many technicians will say that market fundamentals such as supply and demand don’t even matter, that they are simply part of the puzzle already reflected in the chart picture. For the most part, that is taking technical analysis to an extreme, and it is better to consider chart analysis as simply one more tool to help us become better investors. There are highly successful traders who only use a fundamental approach, and there are equally impressive traders who rely on technical analysis for their trading decisions.

Technical Analysis: Predicting the Future Market through Technical Analysis Chart Patterns

Getting in the financial market means you will be investing your hard earned cash in an attempt to make a profit. This is why you should treat trades seriously and not something you should play around with. You need to be sure of your investment in order to profit from it and minimize the risk of losing your money.

When investing in the financial market, you have to know that you have to lose money in order to gain money. As you probably know, businesses spendS cash to gain cash. They spend it on advertising, and they spend it on the goods they want to sell. The same goes for the financial market. You will be investing money in order to gain money. If you don’t spend money, your money will remain stagnant.

You should accept the fact that you will definitely lose some money in the financial market. But, if you do it right, you can cut losses and develop profit.

This is why there are tools that are being researched by investors in the market.

An example of one good tool to minimize risk and maximize profit is through technical analysis.

This is a tool that is supposed to predict the outcome of the market. However, many people are still skeptical with technical analysis and consider it more as an art instead of exact science. There is no scientific proof that supports technical analysis.

But, since there are a few alternatives in predicting the outcome of the market, this tool can be used for speculation.

Technical analysis depends on charts to predict the outcome of a specific financial instrument, like stocks or currency. Many people are beginning to use this kind of tool in order to cut their losses and maximize their potential income. With this kind of tool, you can be sure that you will have a guide in your decisions.

You should be aware that every decision you make in the financial market will affect your income and losses, if you can act quickly, you can eventually gain profit and minimize losses.

The charts used in technical analysis will display the highs and lows of the market. A technical analyst will base their decisions on the price trend. They will predict the outcome of the market by basing it on the past actions of a particular stock, or currency.

There are three kinds of charts that technical analysts examine to determine where the prices will likely go. The first kind of chart is the simplest and the easiest to read. This chart is called line charts. This chart will show you the broad overview of the price movement. Since this chart only shows the closing price at a specified time, it can be very easy to pick out patterns and trends.

However, this kind of chart doesn’t provide the details that bar and candlestick charts can provide.

The second type of chart used is called the bar chart. This kind of chart will display the price spread in a specified time interval. It is easy to tell if the price rose or fell because it will show both the opening price and the closing price on that time interval. However, in order to read bar charts accurately, you will need software that will show real time bar chart streaming and has a zoom capability.

The next type of chart is called the candlestick chart. This chart is relatively similar to bar charts in showing the high highs, the high lows, the low lows and the low highs. However, the candlestick chart is much easier to read because it is color coded. It will be a great help in your analysis.

These are the charts used by technical analysts. With this charts, you can determine the price trend of a particular stock or currency. Basing from this charts, you can predict the future market for your stocks or the currencies you are holding.