Technical analysis is based on the hypothesis that all data can affect the performance of a stock, company fundamentals, economic factors and market sentiments, is mirrored already in its stock prices.
Consequently, technical analysts do not care to analyze the fundamentals of the business.
In its place, the move towards is to estimate the direction of prices through the learning of patterns in historical market data - price and volume. Technicians deem that market activity will produce indicators in price trends that can be used to predict the direction and scale of stock price movements in future.
There are three necessary elements in accepting price behaviour:
The history of past prices offerssigns of the underlying trend and its direction.
The volume of trading that goes along with price movements offersignificant inputs on the underlying might of the trend.
The time span over which price and volume are observed factors in the impact of long term factors that influence prices over a period of time
Technical analysis put together these three elements into price charts, points of support and resistance in charts and price trends.
By monitoring price and volume patterns, technical analysts try to understand if there is sufficient buying interest that may take prices up, or vice versa.
Technical Analysis is a dedicated stream in itself and involves study of various Trends- upwards,downwards or sideways, so that traders can benefit by trading in line with the trend.
Identifying support and resistance levels, which symbolize points at which there is a lot of buying and selling interest correspondingly, and the implications on the price if a support and resistance level is broken, are significantwinding up that are drawn from past price movements.
For instance, if a stock price is moving closer to an established resistance level, a holder of the stock can gain by booking profits at this stage since the prices are expected to draw in once it is close to the resistance level.
If a support or resistance is broken, accompanies by strong volumes, it may indicate that the trend has picked up the pace and supply and demand circumstances has changed.
Trading volumes are imperative parameters to substantiate a trend. An upward or downward trend should go together withstrong volumes.
If a trend is not supported by volumes or the volumes diminish, it may point out a weakness in the trend.
Technical analysis alters the price and volume data into charts that symbolize the stock price movements over a period of time.
Some of the charts used comprise line charts, bar charts, candlestick chart. The model thrown up by the charts are used to identify trends, reversal of trends and prompts for buying or selling a stock.
Characteristically, chartists use moving average of the price of the stock to decrease the impact of day to day fluctuations in prices that may make it complicated to recognize the trend.
Contrasting fundamental analysis, technical analysis is not disturbed if the stock is trading at a fair price relative to its intrinsic value.
It restrictions itself to the future movements in prices as indicated by the historic data.
It is used for short-term term trading activities and not essentially long-term investing.