Define Technical Analysis

Introduction

The share price movement is analyzed broadly with two approaches, namely, fundamental approach and the technical approach. Fundamental approach analyses the share prices on the basis of economic, industry and company statistics. If the price of the share is lower than its intrinsic value, investor buys it. But, if he finds the price of the share higher than the intrinsic value he sells and gets profit. The technical analyst mainly studies the stock price movement of the security market. If there is an uptrend in the price movement investor may purchase the scrip. With the onset of fall in price he may sell it and move from the scrip. Basically, technical analysts and the fundamental analysts aim at good return on investment.

Technical Analysis

It is a process of identifying trend reversals at an earlier stage to formulate the buying and selling strategy. With the help of several indicators they analyzed the relationship between price - volume and supply-demand for the overall market and the individual stock. Volume is favorable on the upswing i.e. the number of shares traded is greater than before and on the downside the number of shares traded dwindles If it is the other way round, trend reversals can be expected.

Assumptions

 The market value of the scrip is determined by the interaction of supply and demand.

The market discounts everything. The price of the security quoted represents the hopes, fears and inside information received by the market players. Inside information regarding the issuing of bonus shares and right issues may support the prices. The loss of earnings and information regarding the forthcoming labour problem may result in fall in price. These factors may cause a shift in demand and supply, changing the direction of trends.

The market always moves in trend. Except for minor deviations, the stock prices move in trends. The price may create definite patterns too. The trend may lie either increasing or decreasing. The trend continues for some time and then it reverses.

Any layman knows the fact that history repeats itself. It is true to the stock market also. In the rising market investors’ psychology have tip beats and they purchase the shares in greater volumes, driving the prices higher. At the same time, in the down trend they may be very eager to get out of the market by selling them and thus plunging the share price further. The market technicians assume that past prices predict the future.

History of Technical Analysis

The technical analysis is based on the doctrine given by Charles H. Dow in 1884, in the Wall Street Journal. He wrote a series of articles in the Wall Street Journal A.J. Nelson, a close friend of Charles Dow formalized the Dow Theory for economic forecasting.

The analysts used charts of individual stocks and moving averages in the early 1920’s. Later on, with the aid of calculators and computers, sophisticated techniques came into vogue.