Friday, May 20, 2011

What is Technical Analysis? - Explains InvestorZclub

Technical Analysis Definition

- Technical analysis is the study of stock price behavior by analyzing its chart.

- Technical analysis is done to uncover trends in stock and the Markets in general.

- Technical analysis helps in taking advantage of trends. With this the investors have the   opportunity to

enter as well as hold profitable positions in stocks on the move.

Technical analysis Theory was conceptualized by Dow Jones, the editor of wall street Journal. While recording price movements of various securities, he observed that most stocks move in tandem with the market, going up when the market goes up and vice versa.

In order to interpret market behavior, Dow constructed two indices called Dow Jones Industrial Average (DJIA), and Dow Jones Transportation average (DJTA). He proposed a theory called Dow Theory which conceptualized the practice of recognizing trend. Dow Theory today has become the foundation of technical Analysis Practice.

Rationale of Technical Analysis

Technical analysis believes that it is possible to forecast the future price of a share by looking at the past price movements. Their main assumptions are:

1. The market price of a security is determined solely by supply and demand. Any shift in the supply demand relationship, can be detected sooner or later in the action of the market

2. Supply and demand are governed by numerous factors relied upon by fundamentalists, as well as opinions, moods guesses and blind necessities.

3. Disregarding minor price movements stock prices tend to move in trend that persists for an appreciable length of time.

4. Some chart patterns tend to recur and their recurring prices can be used to forecast the price movement.

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