19-03-2014, 02:47 PM
Technical Analysis Tutorial
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Introduction
There are two major types of analysis for predicting the performance of a company's
stock - fundamental and technical. The latter looks for peaks, bottoms, trends,
patterns, and other factors affecting a stock's price movement and then making a
buy/sell decision based on those factors. It is a technique many people attempt,
though very few are truly successful.
Today, the world of technical analysis is huge. There are literally hundreds of
different patterns and indicators investors claim to be successful. Trying to keep this
tutorial short was not an easy task, but we will try our best to scratch the surface
and introduce you to the different types of stock charts and the various technical
analysis tools.
What is Technical Analysis?
Technical analysis is a method of evaluating securities by analyzing statistics
generated by market activity, past prices, and volume. Technical analysts do not
attempt to measure a security's intrinsic value; instead they look for patterns and
indicators on stock charts that will determine a stocks future performance.
Technical analysis has become popular over the past several years, as more and
more people believe that the historical performance of a stock is a strong indic ation
of future performance. The use of past performance should not come as a big
surprise. People using fundamental analysis have always looked at the past
performance by comparing fiscal data from previous quarters and years to determine
future growth. The difference lies in the technical analyst’s belief that securities
move with very predictable trends and patterns. These trends continue until
something happens to change the trend, and until this change occurs, price levels
are predictable.
Some technical analysts claim they can be extremely accurate a majority of the time.
There are many instances of investors successfully trading securities with only the
knowledge of its chart and without even understanding what the company does.
Technical analysis is a terrific tool, but most agree that it is much more effective
when combined with fundamental analysis.
The Point & Figure Chart
This type of chart is somewhat rare, in fact most charting services do not even offer
the point and figure chart. This is a chart that plots day-to-day increases and
declines in price. A rising stack of X’s represents increases while a declining stack of
O’s represents decreases. These types of charts were traditionally used for intraday
charting (a stock chart for just one day), mainly because it can be long and tedious
to create P&F charts over a longer period of time manually.
The idea behind P&F charts is that they help you to filter out less-significant price
movements and let you focus more on the most important trends. Below is an
example of a Point and Figure chart for AT&T (T):
The Money Flow Index
Now that we've taken a look at the Relative Strength Index (RSI), let's take a look at
a more stringent momentum indicator. The Money Flow Index measures the strength
of money flowing into and out of a stock. The difference between the RSI and Money
Flow is that where RSI only looks at prices, the Money Flow Index also takes volume
into account.
Conclusion
There have been entire volumes of textbooks written on technical analysis, this
tutorial just scratches the surface. Technical analysis is one of those fields where
everyone has a different theory on what works and what doesn't. If we can leave you
with one last tip, it is to back test whatever strategy you decide to pursue. Back
testing means looking back at several years’ worth of charts to see how a particular
stock reacts. Different stocks do different things, do your homework first.