November 29, 2009
Spotlight on Technical Analysis
There have been many debates over whether Technical Analysis has an advantage over the traditional fundamental approach to analysis. The main reason for these debates is due to the how the person conducting this type of analysis conceives technical analysis. Very often, you will find that two people studying the same chart will interpret patterns differently thus coming to a different conclusion about future price movements.Over the long period, technical indicators can have some practical value. Some caution is necessary here since there are some market gurus who claim that certain indicators can predict the future direction of stock prices. If you think about this argument for a minute, you will see this scenario is flawed. You must remember that this form of analysis is using past data so the analysis is always in hindsight, this means that for prediction purposes it is mostly useless. People argue that a price at any given time reflects all the information known; this also includes information relating to the future.
Over the years, many market gurus who have make and lost fortunes using technical indicators. There have almost been countless books published by people who claim to have found repeating patterns on charts such as cycle formations, wave theories etc. Many of these patterns are also be found in non-related industry data. This disproves the accuracy of such analysis and has no real merit. Therefore, you should not make trading decisions solely on this type of analysis.
The practical value in technical analysis might stem from the fact that markets can see prolonged periods of random fluctuation, followed by shorter periods of non-random movement. The aim of the technical chartist should be to try to identify the periods where major trends exist.
We will now consider Fundamental analysis. This type of analysis is concentrates on the study of statistics taken from a company’s financial report. The company’s assets, products, strategic plans, industry, current economic climate, these are all factors that are taken into consideration when conducting fundamental research. When conducting fundamental analysis of a company, one should bear in mind that news, management restructuring, oil prices, accounting discrepancies, award of major contracts, can all affect the share price, causing it to rise or fall dramatically in a short period of time. Followers of technical analysis look to identify such movements on charts as breakouts from a trading range.
In a way, technical analysis is a self-fulfilling prophecy? If more people follow and believe in a certain pattern or system, the stronger it becomes and subsequently such action can affect the price of shares or markets. These types of traders generally move together looking for patterns in a complex marketplace.
Studies have shown that many people prefer trading with technical analysis as opposed to buying and holding a stock for a long period. Studies have shown that both methods produced identical results.
In the end, the only way to success, is to innovate. To make money in the stock market, so should try to maintain good profit margins and seek to find with new ideas.
About the Author
Cole Anderson is an experienced trader and writer. More information on trading strategies and information is available from Cybertec Security