Different investors use different tools for their investment portfolios. Universally,
there are two schools of thought - fundamental and technical approaches. While fundamental
analysis deals primarily with issues such as the companies' earnings, dividends,
expected growth and thus how much a particular stock is worth, technical analysis
is more interested in the past behavior of stock prices.
Rather than arguing which one method is more superior in selecting a particular investment,
you should be "open-minded" enough to select the tool that suits your personality
Not very long ago, Normandy discussed investing in the local stockmarket from the
fundamental perspective. This week we take a look at what technical analysis is all
about and why it may or may not be helpful when investing in the local stockmarket.
The discussion is not meant to be comprehensive, but this time we may briefly pick
one or two technical tools for illustration purposes. We will not cover how to read
or interpret these technical tools.
Technical analysis refers to a group of indicators, based on the belief that past
patterns in prices are a reliable indicator of future prices. Technical analysts
believe that past patterns reflect the changing behavior of investors due to various
Technical indicators have been widely used to predict price movements in various
markets such as the stock, currency and bond markets.
Charting is the simplest technical tool available. Technical analysts plot the past
prices of stocks and then study the formation of the pattern created as a guide to
determine any shift in the underlying demand and supply relationship that could reflect
the behavior of investors - thus, determining the time to buy or sell.
There are many types of charts such as the bar charts, line charts, Japanese candle
sticks charts, point-and-figure charts, and etc. The key to technical success is
interpreting various patterns formed on the chart. Investors can find a lot of complex
formations on a chart for trading signals such as the head-and-shoulders formation,
double tops or bottoms, and so forth.
Some of the common terms that we usually come across from any technical commenta
ry are the support and resistance levels. Support levels are the levels below which
prices usually tend not to fall while resistance levels are levels above which prices
tend not to rise.
Other indicators that readers may often come across are the relative strength index
(RSI) and stochastics to indicate an overbought or oversold conditions. An overbought
or oversold market is one where prices have risen or fallen too far and are therefore
likely to retrace.
We have come across many common technical indicators and most of the interpretations
seem straightforward. How well does technical analysis work? There is an on-going
debate on whether using such simple technical tools is effective enough to help you
make money. Technical analysis has attracted quite a large number of followers.