In finance, technical analysis is an analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume. The principles of technical analysis are derived from hundreds of years of financial market data. Some aspects of technical analysis began to appear in Amsterdam-based merchant Joseph de la Vega’s accounts of the Dutch financial markets in analisis fundamental forex trading 17th century. Dow theory is based on the collected writings of Dow Jones co-founder and editor Charles Dow, and inspired the use and development of modern technical analysis at the end of the 19th century.
Fundamental analysts examine earnings, dividends, assets, quality, ratio, new products, research and the like. Technicians employ many methods, tools and techniques as well, one of which is the use of charts. Using charts, technical analysts seek to identify price patterns and market trends in financial markets and attempt to exploit those patterns. These indicators are used to help assess whether an asset is trending, and if it is, the probability of its direction and of continuation. There are many techniques in technical analysis.
Contrasting with technical analysis is fundamental analysis, the study of economic factors that influence the way investors price financial markets. Technical analysis holds that prices already reflect all the underlying fundamental factors. Technical analysis stands in contrast to the fundamental analysis approach to security and stock analysis. Multiple encompasses the psychology generally abounding, i. Also in M is the ability to pay as, for instance, a spent-out bull can’t make the market go higher and a well-heeled bear won’t. In the 1960s and 1970s it was widely dismissed by academics. A core principle of technical analysis is that a market’s price reflects all relevant information impacting that market.
A technical analyst therefore looks at the history of a security or commodity’s trading pattern rather than external drivers such as economic, fundamental and news events. It is believed that price action tends to repeat itself due to the collective, patterned behavior of investors. Hence technical analysis focuses on identifiable price trends and conditions. Based on the premise that all relevant information is already reflected by prices, technical analysts believe it is important to understand what investors think of that information, known and perceived. Technical analysts believe that prices trend directionally, i. The basic definition of a price trend was originally put forward by Dow theory. An example of a security that had an apparent trend is AOL from November 2001 through August 2002.
A technical analyst or trend follower recognizing this trend would look for opportunities to sell this security. AOL consistently moves downward in price. The series of “lower highs” and “lower lows” is a tell tale sign of a stock in a down trend. Note that the sequence of lower lows and lower highs did not begin until August. Then AOL makes a low price that does not pierce the relative low set earlier in the month. Later in the same month, the stock makes a relative high equal to the most recent relative high. In this a technician sees strong indications that the down trend is at least pausing and possibly ending, and would likely stop actively selling the stock at that point.
Technical analysts believe that investors collectively repeat the behavior of the investors that preceded them. To a technician, the emotions in the market may be irrational, but they exist. Technical analysis is not limited to charting, but it always considers price trends. For example, many technicians monitor surveys of investor sentiment. These surveys gauge the attitude of market participants, specifically whether they are bearish or bullish. Recently, Kim Man Lui, Lun Hu, and Keith C.
Chan have suggested that there is statistical evidence of association relationships between some of the index composite stocks whereas there is no evidence for such a relationship between some index composite others. They show that the price behavior of these Hang Seng index composite stocks is easier to understand than that of the index. Professional technical analysis societies have worked on creating a body of knowledge that describes the field of Technical Analysis. A body of knowledge is central to the field as a way of defining how and why technical analysis may work.