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Fundamentals of Technical AnalysisFundamentals of Technical Analysis
Technical analysis was truly an arcane art before the internet boom. Chartists performtechnical analysis in their secret rooms with data that was carefully collected from professional sources. Those were the times when stock prices and data did not have amedium through which to be readily available to the public and be ran through publiclyavailable software to produce the charts that are available today.Today, with internet in almost every household, technical analysis became an art anyonecould practice. Complex charts, technical indicators and analysis that was once the soledomain of a few highly paid wallstreet analysts are now available to anyone who wants it,often for free.Technical analysis also became linked to short term aggressive trading instruments suchas stock options and futures because of its excellent short term predictive nature.With technical analysis this popular, I feel obligated to teach you once and for alleverything you need to know about how to conduct proper technical analysis before youstart looking at your first chart. A lot of amateurs fail at technical analysis simply becausethey didn’t have the necessary basic knowledge to understand how to interpret technicalindications properly in the first place. With the knowledge in this article, you will definiteexperience more success at technical analysis.
Summary of Technical Analysis Basics
2 Principles of Technical Analysis: Significance, Prudence2 Key Tools: Charts, Indicators2 Key Components: Price, Volume5 Key Concepts: Resistance, Support, Trend, Patterns, Setups
2 Principles of Technical Analysis: Significance, Prudence
The two principles of technical analysis are the most important foundation inunderstanding technical analysis and interpreting technical analysis properly. Too manyamateurs misinterpret technical indications simply because they did not understand thesetwo simple principles. This is also the only part in this tutorial that addresses the mentalaspect of technical analysis and should be clearly understood before moving on. The two principles of technical analysis are Significance and Prudence.
 
Technical Analysis Principle #1: SignificanceSignificance refers to the degree that a technical indication is true. Take breakout andreversal signals for example. Does a 0.5% close above a resistance level indicate a breakout? Does a 1% reversal in a bearish stock that has fallen more than 40% indicate areversal? No. The degree of significance for both cases is just too weak. Most technicalanalysis beginners who do not understand the principle of significance would take a smallfake out as a breakout and then act on the wrong stocks. The judgment of significance is,however, a matter of experience. How much of a breakout represents a significant breakout? How much of a reversal represents a significant reversal and how big a candlerepresents a strong morning star signal? The judgment of significance is something youneed to acquire and refine as you put more years behind your ears.Technical Analysis Principle #2: PrudencePrudence refers to the ability to say “No” when in doubt. Technical analysis is more of anart than a science. This is because even though technical indications are scientificallygenerated, the interpretation of technical indications is highly subjective. You are going toexperience many marginal or doubtful moments in technical analysis. Technical signalsthat “almost made it” as well as technical signals that are “neither here nor there”. Thoseare the times to exercise the technical analysis principle of Prudence and to make themost conservative interpretation. When a signal is marginal, you should always exercise prudence by giving benefit of the doubt to disqualifying the signal. When a significant breakout signal is produced after a huge drawdown, you should exercise prudence bywaiting for further confirmation or enter the position gradually over a few days.
2 Key Tools: Charts, Indicators
Technical Analysis Key Tool #1: ChartsChart reading is the most fundamental tool in technical analysis and is also why technicalanalysis is frequently referred to as “Chartology”. Before the popularization of theinternet, during the age where analysts still read tapes, technical analysts have to obtainstock quotes from “secret sources” and then plot them down on huge chart papers in their secret rooms. What then is a chart? A chart is simply a plot of the stock prices made into acurve. A chart’s basic function is to show the TREND of a stock’s price action. Without achart, a stock closing at a price of $50 has no meaning at all. With a chart, you can clearlysee the price action trend down from $100 to $50, giving investors the first indication of where the future price action of that stock might be. In the beginning, charts are plottedmerely as a single line joining the prices together. Recently, with more and more powerful computers and software, more innovative and informative plotting methods likecandlesticks, bar charts and point and figure charts are developed and made easilyavailable through the internet. No matter what type of chart you look at, the only aim is to provide an indication of where the future movement of the stock might be. Another important aspect of charts is “Chart Patterns”. Different types of charting method can
 
 produce easily recognizable patterns and formations that can be associated with certainfuture expectations. Popular chart patterns include “morning stars” in candlestick charting, “double top breakout” in point and figure charting and “double bottom”formation.Technical Analysis Key Tool #2: IndicatorsTechnical Indicators are the other key tool in technical analysis. Technical indicators aregraphical representations of various mathematical formulas based on the stock price andtransaction volume. The are literally thousands of technical indicators out there and moreare being developed daily as new finance theories are translated into mathematicalformulas every day. Technical indicators’ main function is to tell when a stock isconsidered oversold or overbought and when a stock is considered weak or strongrelative to its past action. There are literally endless amount of formulas that can be usedto provide those indications, hence the endless number of technical indicators. Becausethere are so many different technical indicators out there, beginners should start with afew well known and widely used ones as those tends to be used by institutional investorsas well. It can be argued that the effectiveness of a technical indicator lies in its popularity. The more investors acting on the same indicator, the stronger the predictivenature of the indicator becomes. A self fulfilling prophecy? Maybe.
2 Key Components: Price, Volume
Surprisingly, so many different charting methods and technical indicators used intechnical analysis all stems from the same 2 key components, Price and Volume. The price and volume of a stock are the only two publicly available information pertaining tothat stock. Out of its price and volume, stock charts and technical indicators are created.Candlestick and bar charts are constructed out of the opening price, closing price as wellas high and low prices. Relative Strength Index is created out of the price as well asvolume of a stock compared against its historical data.
5 Key Concepts: Resistance, Support, Trend, Patterns, Setups
The 5 key concepts of technical analysis are the 5 most important analytical methods intechnical analysis. Understanding all 5 are critical to the mastery of technical analysis.All 5 key concepts work together to help technical analysts predict future stock movement and know when to buy or sell a stock. Of particular importance is the ability totell when to buy or sell a stock. This is the kind of information that fundamental analysiswill not provide.Technical Analysis Key Concept #1: Resistance Level
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avinash.aniket

can u mail me this doc. my mail id is avinash.aniket@gmail.com.

reply06 / 09 / 2009
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