Investment: Technical Analysis basics 1

Investment: Technical Analysis basics 1

There are two common approaches when investigating any investment: fundamental and technical analysis. Fundamental analysis focuses on the company, looking at things like balance sheets, book value and price earnings ratios, and is used to determine if the stock being considered is a good long-term investment. Technical analysis focuses almost entirely on the stock price and its concomitant patterns. The fundamental assumption with fundamental analysis is that the stock price will reflect the company’s profitability. The more profitable the company is, the higher the stock price will be. Investors using fundamental analysis are certain that one follows the other.

Technical analysis, on the other hand, also called chart analysis, is based on completely different assumptions. The premise is that the market is made up of a large group of people behaving in predictable patterns. The challenge for technical analysts is to therefore find these patterns in the price movements. The patterns tend to become obscured in the price trends, since outside events tend to influence the movement of the price. These outside events tend to add noise that mask or change the price patterns of the stock. Technical analysis uses many tools or techniques. However, the goal is always to predict the price movement of the stock. If the prediction is correct, then a profit is made.

Fundamental analysis is considered more conservative than a technical analysis approach. There is far less agreement as to the soundness of technical analysis, but the appeal of technical analysis is the perception that one can make a profit more quickly than with a buy-and-hold approach, the typical result of fundamental analysis. The returns and payoffs differ from person to person.

So in short: What is Technical Analysis?

"Technical analysis is the practice of studying a stock’s past prices and trends in an attempt to determine its future prices and trends. People who utilize technical analysis often study charts and graphs of a particular stock, industry, or sector to find patterns."

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