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Technical Analysis

Technical Analysis

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Published by sd5239

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Published by: sd5239 on Sep 20, 2009
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We all know that future price of stock is the central concern of theequity investment decision.The fundamentalists makes a judgment of the stock’s future price witha risk-return framework based upon economy, industry and companyanalyses.The principal decision variables take the form of earnings per share anddividend pay-out.Here we shall discuss an alternative approach to predicting stock price.This approach is called
technical analysis or chartist approach
.We will attempt answers to the following questions:
What is the meaning of technical analysis?
 How does it differ from fundamental analysis?
What is its origin?
What are its tools and techniques?What are their limitations?
Technical Analysis is concerned with a critical study of the daily or weekly price and volume data of the Index comprising several shares,like Bombay Stock Exchange Sensitive Index (SENSEX), or of a particular stock, may be ‘Tata Steel’ etc.
The price of most the Indices and the stocks keep on varying in anerratic fashion, so much so that the difference between the high and thelow during a year may exceed by a ratio of two or more, even thoughthe fundamentals do not change much.For instance, in spite of the daily variation of price, the earnings of thecompany do not vary during the year, the book value, the loans, the profit margin, the taxes and other charges, depreciation, etc. may notchange from one annual report to the other.Hence, the fundamentals dictate the price horizon of the shares of acompany, but are not able to say what the price at a particular point of time would be.
Technical analysis incorporates techniques to determine when:
an equity is overbought,
at which point of time it can be sold at a high price, or 
at which point of time it is oversold,
at which point of time it may be bought at a low price.
A technical analyst believes that the price movements, whatever their cause, once in force persist for some period of time and form patternswhich can be detected.He further believes that by critical study of these patterns of price andvolume of trading, he can predict whether prices are moving higher or lower and even by how much.In sum and substance, technical analyst believes that the forces of supply and demand, guided by logical as well as emotional factors,
reflect in the price and volume movements.
And by carefully examining the pattern of these movements, future price of stock can be reliably predicted.And since the whole process involves much less time and data analysis,compared with fundamental analysis, it facilitates timely decision.
Timing of Trade is the Important Thing 
Experts advise you to invest in a fundamentally strong company, onewhich has high reserves, large profits, low debt, and pays highdividends.But, if you buy such a share at the wrong time and then the price movesdown, you lose, in spite of the strong fundamentals.

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