Stock Chart Analysis
Technical Analysis Intro
By Frank Kneipher
Jun 28, 2007 - 9:25:16 AM

Technical Analysis Intro

Technical analysts (or technicians) identify non-random price patterns and trends in financial markets and attempt to exploit those patterns. While technicians use various methods and tools, the study of price charts is primary. Technicians especially search for archetypal patterns, such as the well-known head and shoulders  reversal pattern, and also study such indicators as price , volume , and moving averages  of the price. Many technical analysts also follow indicators of investor psychology - market sentiment .

Technicians seek to forecast price movements such that large gains from successful trades exceed more numerous but smaller losing trades, producing positive returns in the long run through proper risk  control and money management .

There are several schools of technical analysis. Adherents of different schools (for example, candlestick charting , Dow Theory , and Elliott wave theory ) may ignore the other approaches, yet many traders combine elements from more than one school. Technical analysts use judgment gained from experience to decide which pattern a particular instrument reflects at a given time, and what the interpretation of that pattern should be. Technical analysts may disagree among themselves over the interpretation of a given chart.

Technical analysis is frequently contrasted with fundamental analysis, the study of economic factors that some analysts say can influence prices in financial markets. Pure technical analysis holds that prices already reflect all such influences before investors are aware of them, hence the study of price action alone. Some traders use technical or fundamental analysis exclusively, while others use both types to make trading decisions.

The principles of technical analysis derive from the observation of financial markets over hundreds of years. The oldest known branch of technical analysis is the use of candlestick techniques by Japanese traders as early as the 18th century , and now one of the main charting tools. Munehisa Homma , a successful rice trader in 18th century Japan, wrote the first book on technical analysis. He addressed the market's bullish and bearish cycles, and said that successful trading depends on understanding market psychology.

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 from the end of the 19th century . Modern technical analysis considers Dow Theory its cornerstone.

Many more technical tools and theories have been developed and enhanced in recent decades, with an increasing emphasis on computer -assisted techniques.

Technicians say that a market's price reflects all relevant information, so their analysis looks more at "internals" than at "externals" such as news events. Price action also tends to repeat itself because investors collectively tend toward patterned behavior -- hence technicians' focus on identifiable trends and conditions.

Based on the premise that all relevant information is already reflected by prices, technical analysts believe it is redundant to do fundamental analysis -- they say news and news events do not significantly influence price, and cite supporting research.

On most of the large market moves, the information that the media cites as the cause of the market move is not particularly important. The media reports on adjacent days also fail to reveal any convincing accounts of why future profits or discount rates might have changed. Our inability to identify the fundamental shocks that accounted for these significant market moves is difficult to reconcile with the view that such shocks account for most of the variation in stock returns.

Frank Kneipher

FKPRINTS1@YAHOO.COM