|
|||
|
|
|
|
|
In the investment world, there are two generally accepted types of securities analysis. We're not talking about using the stars to predict stock prices... technical analysis and fundamental analysis are valid systems that fund managers, brokers, and individual investors use every day. We hear these terms often in the investment world, but many investors don't really understand what they are, the difference between them, or how they're used. This week let's take a look at technical analysis.
Technical analysis uses history and past market data to try to predict the behavior of stocks and other investment vehicles. Examples of the many tools used for technical analysis include: price charts, volume charts, supply/demand, and oscillators.
A simple example of technical analysis is the "buy low, sell high" theory. Take this chart for example.
Stock XYZ
When stock XYZ comes down from a high and reaches a new low at point A, technical analysis says that you might expect it to rebound upwards. After rebounding upwards, stock XYZ may reach a new high of point B. When reaching point B, technical analysis may predict that stock XYZ will begin a downward trend.
While the buy low and sell high technique is very popular, there are great problems with it. For example, how do you know where the high and low points of this chart are? Well, you don't until the stock has reached the low point, and by then it may be too late. This technique involves a lot of guesswork. When a stock reaches a new low, there is an equal chance that it will continue sinking or that it will rebound upwards.
So does technical analysis work? Sometimes, if you're lucky. Some investors and money management companies have had great success with technical analysis. Prudential Securities' Chief Equity Analyst, Ralph Acompora, is known for his success, luck, and knowledge with technical analysis.
Technical Analysis is very complex and there are many indicators, systems, charts, and assumptions involved. We don't recommend relying on technical analysis alone in making investment decisions. To become familiar with it, much time, studying, and testing of the theories and tools is involved.
Technical Analysis