Technical Analysis

There are two primary methods of security analysis

1) Fundamental analysis
2) Technical analysis.
Technical analysis focuses on the
statistical analysis of price movements.
Technical analysis attempts to understand the market
sentiment behind price trends by looking for patterns
and trends rather than analyzing a security's
fundamental factors.
 Technical Analysis
• Technical analysts, technicians or market analysts develop
technical trading rules from observations of past price
movements of the stock market and individual stocks.
• The philosophy behind technical analysis is in sharp contrast to
the efficient market hypothesis, which contends that past
performance has no influence on future performance or
market values.
• It also differs from what we learned about fundamental
analysis, which involves making investment decisions based on
the examination of the economy, an industry, and company
variables
• In contrast to the efficient market hypothesis or fundamental
analysis, technical analysis, according to the Market
Technicians , is a method of evaluating securities by analyzing
 Technical Analysis
• Therefore, technical analysis is an alternative method
of making the investment decision and answering the
questions:
• What securities should an investor buy or sell? When
should these investments be made?
• In Technical analysis the stock's price and volume are
the only inputs.
• The core assumption is that all known fundamentals
are factored into price; thus, there is no need to pay
close attention to them.
• Technical analysts use stock charts to identify patterns
and trends that suggest what a stock will do in the
 Technical Analysis
• Technical analysis display price data and volume data
graphically in charts. The charts are analyzed using various
indicators in order to make investment recommendations.
• Technical analysis can be applied to any security with
historical data, from stocks to bonds, currencies to
commodities, and anything in between. As long as there is
past price information, there's an opportunity to use
technical analysis.
• In this chapter, we’ll usually analyze stocks only but keep in
mind that these concepts can be applied to any type of
security.
• In fact, technical analysis is far more prevailing in
commodities and forex markets where traders focus on
short-term price movements.
 Technical Analysis
• Technical analysis is not only used by technical traders.
Many fundamental traders use fundamental analysis
to determine whether to buy into a market, but
having made that decision, then use technical analysis
to pinpoint good, low-risk buy entry price levels.
• Technical traders believe that current or past price
action in the market is the most reliable indicator of
future price action.
• This is often done by charting the relevant data to
generate short-term trading signals.
• Once charted, a technical analyst can interpret the
information to make an informed trading decision.
 Principles of Technical Analysis
• There are three core principles in technical analysis:
• Market action discounts everything. A stock's price
reflects everything that has or could affect a security.
• Prices move in trends. This means that after a trend
has been established, the future price movement is
more likely to be in the same direction as the trend
until a new trend is established.
• History repeats itself. Prices are predictable because
history repeats itself. By analyzing chart patterns, we
can identify trends and forecast the future of a stock
or the market as a whole.
 Technical Analysis

• Technical analysis suggests that all the

relevant market information is reflected in the
price, and that history is likely to repeat itself.
This isn't thought to necessarily happen in the
exact same way, but certainly in similar
patterns.
• Of course, different analysts can have different
interpretations of the same data.
 A Brief History of Technical Analysis

• The technical analysis of stocks and trends has been used for hundreds
of years.
• In Europe, Joseph Vega adopted early technical analysis techniques to
predict Dutch markets in the 17th century.
• In its modern form, however, technical analysis owes heavily to
Charles Dow, William P. Hamilton, and many others—including a
ballroom dancer named Nicolas Darvas.
• Charles Dow, creator of the Dow Jones Industrial Average and founder
of the Wall Street Journal, introduced technical analysis to market
watchers in the late 1800s through a regular column in the newspaper.
His ideas on stock price patterns came to be known as Dow Theory,
and they provide the foundation for much of the technical analysis
that came later.
• The diverse collection of theories from early technical analysts were
brought together and formalized in 1948 with the publishing
of Technical Analysis of Stock Trends by Robert D. Edwards and John
 How to Use Technical Analysis

• The core principle underlying technical analysis is that the market

price reflects all available information that could impact a market. As a
result, there's no need to look at economic, fundamental, or new
developments since they're already priced into a given security.
• Technical analysts generally believe that prices move in trends and
history tends to repeat itself when it comes to the market's overall
psychology. The two major types of technical analysis are chart
patterns and technical (statistical) indicators.
• Chart patterns are a subjective form of technical analysis
where technicians attempt to identify areas of support and resistance
on a chart by looking at specific patterns. These patterns, supported
by psychological factors, are designed to predict where prices are
regulated, following a breakout or breakdown from a specific price
point and time. For example, an ascending triangle chart pattern is a
bullish chart pattern that shows a key area of resistance. A breakout
from this resistance could lead to a significant, high-volume move
higher.
 Uptrend vs. downtrend
• Upward trends are characterized by an asset price hitting a series of higher
highs and higher lows, while downward trends are marked by lower highs
and lower lows.
• Most traders trade in the direction of the trend. Traders who go opposite
the trend are called contrarian investors.
• Contrarian investing is an investment style in which investors purposefully
go against prevailing market trends by selling when others are buying and
buying when most investors are selling.
• Berkshire Hathaway Chair and Chief Executive Officer (CEO) Warren
Buffett is a famous contrarian investor.
• Contrarian investors believe that people who say the market is going up do
so only when they are fully invested and have no further purchasing
power. At this point, the market is at a peak. So, when people predict a
downturn, they have already sold out, and the market can only go up at
this point.
Uptrend vs. downtrend
 Support and resistance
• Support and resistance are two foundational concepts in technical analysis.
Understanding what these terms mean and their practical application is essential
to correctly reading price charts.
• Prices move because of supply and demand. When demand is greater than supply,
prices rise. When supply is greater than demand, prices fall. Sometimes, prices will
move sideways as both supply and demand are in equilibrium.
• In a downtrend, prices fall because there is an excess of supply over demand. The
lower prices go, the more attractive prices become to those waiting on the
sidelines to buy the shares. At some level, demand that would have been slowly
increasing will rise to the level where it matches supply. At this point, prices will
stop falling. This is support.
• It is at this level that demand will usually overcome supply, causing the price
decline to halt and reverse.
• Resistance is the opposite of support. Prices move up because there is more
demand than supply. As prices move higher, there will come a point when selling
will beat the desire to buy. This happens for a variety of reasons. It could be that
traders have determined that prices are too high or have met their target. This is
resistance. Like support, it can be a level or a zone.
Ascending Vs des.cending triangle
 What is a Sideways Market?
• A sideways market can be simply defined as one with no
bullish or bearish trends. Prices trade within a horizontal
range, with no definitive upward or downward movement.

• To put that more plainly, a sideways market features tight

ranges; prices don’t make higher highs or lower lows.

• Sideways markets occur with frequency and often indicate

that traders have some uncertainty about the direction the
market is taking. As a result, many traders exercise caution,
consolidating profits during range-bound periods.
Sideways Market
 Differences Between Fundamental and Technical Analysis
• The difference between fundamental and technical
analysis can be drawn clearly on the following grounds:
• Fundamental Analysis is a method of examining security
so as to identify its intrinsic value for long term investment
opportunities. As against, Technical Analysis is a method
of evaluating and forecasting the price of a security in
future, on the basis of price movement and volume of
transaction. It identifies what a stock will do in future.
• In fundamental analysis, longer periods are used to
analyse stocks as compared to technical analysis. Hence,
fundamental analysis is employed by those investors who
want to invest in stocks whose value will increase in
several years. On the contrary, technical analysis is used
when the trade is for short term only.
 Differences Between Fundamental and Technical Analysis

• The time difference between the two analysis is not only

experienced in their approach but in their objective too, wherein the
technical analysis is concerned with trading, fundamental analysis
talks about investment. As most of the investors use fundamental
analysis to buy or hold stocks of the company, whereas traders rely
on the technical analysis, to make short term profits.
• While fundamental analysis aims at ascertaining the true intrinsic
value of the stock, technical analysis is used to identify the right time
to enter or exit the market.
• In fundamental analysis, decision making is based on the
information available and statistic evaluated. On the contrary, in
technical analysis, decision making is based on market trends and
the stock price.
• In fundamental analysis, both past and present data are considered,
whereas, in technical analysis, only past data is considered.
• Fundamental Analysis is based on financial statements, whereas
 Differences Between Fundamental and Technical Analysis

• In fundamental Analysis the intrinsic value of the stock

can be ascertained by analysing an income statement,
balance sheet, cash flow statement, profit margin,
return on equity, price to earnings ratio, etc.
• However, technical analysts rely on the chart patterns
(such as continuation pattern and reverse patterns),
price actions, technical indicator, resistance and
support, to analyse the future price trends. Here
resistance is the point where the investor is of the
view that price will not rise further and is ready to sell,
and support is a point where the investor is of the
view that price will not fall further and is ready to buy.
 Differences Between Fundamental and Technical Analysis

• In fundamental analysis, the future price of the

security is decided upon the past and present
performance and profitability of the company. As
opposed, in technical analysis the future prices are
on the basis of charts and indicators.
• Fundamental analysis is done by long term position
trader, while technical analysis is done by swing
trader and short term day trader.
• In fundamental Analysis the intrinsic value of the
stock can be ascertained by analysing an income
statement, balance sheet, cash flow statement, profit
margin, return on equity, price to earnings ratio, etc.
• However, technical analysts rely on the chart patterns
(such as continuation pattern and reverse patterns),
price actions, technical indicator, resistance and
support, to analyse the future price trends. Here
resistance is the point where the investor is of the
view that price will not rise further and is ready to
sell, and support is a point where the investor is of the
view that price will not fall further and is ready to buy.