What is technical analysis?
May 27th, 2011
While putting together the course material for the Basics of Stock Markets course, we thought that it would be necessary to go to the basics and inform all those interested in this course, as to what topics we would be covering. One of the major topics would be technical analysis. A excerpt from it’s wiki -
Technical analysis is a financial term used to denote a security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume.
While fundamental analysts examine earnings, dividends, new products, research and the like, technical analysts examine what investors fear or think about those developments and whether or not investors have the wherewithal to back up their opinions; these two concepts are called psych (psychology) and supply/demand. Technicians employ many techniques, 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.
To put this simply, what technical analysis does is identify trends in the past market data without having to go into the nitty-gritties of financial analysis. Thus, all that is required as a basic building block is trend lines and trend analysis.
If you look at the above trend line (forget the fact that it is showing the Nifty Index), using concepts of trend analysis, any one can come up with the following calculations (the lines drawn connecting the lower dips and higher peaks). You can also notice two similar downward trends.
Engineering has analysis built-in in its pedagogy. As a fellow engineer, I find it far easier to look and numbers and identify patterns than focusing on how balance sheets are made. In fact, during my stint at IIM-Indore, most of the engineers used to face difficulty in Accounting due to the fact that we are analytical in nature. It’s inbuilt into us.
As an engineer, I often used to struggle trying to understand the nuances of accounting and how it impacted the stock prices. However, the technical analysis approach requires one to use simple trend analysis techniques to predict the behavior of the stock instead of looking at the financials.
Over the weeks, we will be teaching you how to go about doing technical analysis and trade on live markets.
About the Author
Prasad is the Chief Technology Officer at Pristine. Prior to joining Pristine, he has worked in leadership roles in the education sector, the retail sector and the e-commerce sector.
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