The two foremost analyses in predicting the capital markets are the fundamental analysis and the technical analysis. Both have their own advantages and limitations. Many investors use both of them together as complementary to one another.
Basis of Technical Analysis
The fundamental principle behind technical analysis is that the fundamentals get quickly absorbed in the price of an asset and, therefore, it is enough to concentrate only on technical. According to believers of technical analysis, it is not at all necessary to ponder over fundamentals of a stock or currency.
It is hard to comprehend and to accurately predict all the factors impacting the price of a traded unit. Moreover, it may also not be necessary to try to give too much attention to all the factors behind the prices of securities and currencies. Therefore, it may not be possible to grasp all the fundamental factors.
We are living in a highly informative age. Whenever there is any important news, it spreads quickly and all the players adjust their positions accordingly and fast. There are hardly any lags. All their actions get immediately reflected in the price of an asset. Therefore, price is the main barometer of the movement of a stock. That is the spirit behind technical analysis.
Importance of Technical Analysis
Technical analysis is mostly applied to equity and forex markets. This is an excellent aid in determining the price of a security and predicting its market movement. With this, one can ignore all the news and simply concentrate on price data over a given period of time.
Technical analysis shows how investors can take care of the fundamentals and the emotions of the market players.
In any case, technical analysis is not an exact science and there is no evidence to support it. Its main relevance is that it reduces risk and maximizes profits.
Components of Technical Analysis
The most important components of this technique of evaluating the prices of stocks or currencies are maps, graphs (including candle stock graphs) and charts.
Technical Analysis may be simple to use for a new trader in this that he need not to spend a lot of time in understanding the fundamentals of a stock or trade. This provides a simple method of evaluating the strength of an investment.
New traders should however, understand that this is just one of several tools. This method is more relevant to professionals and experienced traders.
In order to be successful with this, it is necessary that one identifies the areas of support and resistance. That may not be an easy task.
The overall market movement is mostly based on human instinct. There are many reasons for trading a holding and they behave differently at different points of time.
The other important principle in this is that the reaction time has to be very quick. There are constant ups and downs in price movements. All this demands a high degree of concentration and action. This can be stressful even for seasoned traders, not to mention of the new ones.
The other major factor to consider is that outcome on past trends of stock or currency could be in question.
The Best Strategy
It will be best for a novice trader first to understand the fundamentals of a stock. One should know what is going on behind a stock price. Only after one understands the factors involved in the movement of a security that one can fully appreciate the relevance and utility of technical analysis.
The author has background in business, economics and finance. He is presently researching in finding ways to make money and working on the following website and blogs: