What Is The Purpose Of Technical Analysis

What Is The Purpose Of Technical Analysis


Mark Dearth

Technical analysis is built upon the concept that the market can be timed efficiently by studying the various mechanisms of the marketplace at work, like supply and demand, pricing cycles, along with other outside forces. This is exactly opposite of the random walk or modern portfolio theories, which presupposes that every stocks costs are unpredictable. Technical analysts believe that by charting stock movements and looking for frequently occurring patterns or trends, the movement and price of a stock can be predicted.

Technicians, as analysts who use the practices are often called, believe that the marketplace is cyclical in nature and that by charting stock activity and moving averages, movements could be predicted. Charting is really a easy method that supplies a visual representation of a stocks activity over a certain time period. It’s utilized to spot any trends that may show a person when to purchase or sell.

To obtain a moving average, one would take the last certain number of closing prices of a stock and then divide by that number. For example, adding up the last ten closing prices of XYZ stock and then divide it by the number ten to produce that average. The very next day, the closing price of day one is subtracted and the closing cost of day 11 added to sum, once more divided by ten. These values are then charted and the underlying trends noted.


Technicians primarily use two types of technical indicators, big picture and market technical. The first consists of trading action and the Dow Theory. The Dow Theory tracks the moving averages of two main indexes to examine to overall behavior, relative to changes between bull and bear markets. It is not meant to be predictive, just to figure out when and why the change from strong to weak.

Trading action looks at how and why trading movements occur, noting the cyclical and repetitive nature of the marketplace. For instance, the Presidential Election Indicator claims that during a President’s term, it could be expected for the market to rise in the third year because they’ll be focused on making economic improvements in anticipation of an election year.

Market technical indicators attempt to figure out the future performance of a security by closely looking at the forces that compel marketplace behavior. Breadth of the marketplace, market volume, odd-lot trading-contrarian, and short interest are all various types. Creating graphs that represent pertinent factors could be studied.

Looking at market volume purely analyzes the supply and demand of stocks. When the volume of stocks traded goes up, the market is strong. When it goes down, it’s weak. Breadth of the marketplace looks at the number of advancing securities, those whose costs are on the rise, to those which are declining to signify a change in overall market strength. For example, a narrowing spread could mean that strength is deteriorating and a bear market is beginning when advances outnumber declines.

Examination of short interest looks at the total number of shares being sold short to measure current optimism or pessimism. A rising short sell trend could be indicative of a pessimistic, or weak, market. And lastly, by searching at the number of odd-lots that are being traded, the volume of little traders can be measured. Odd-lots are those that are not traded in amounts of 100. This indicator assumes that small traders are doing the opposite of what should actually be carried out.

Technicians, those who practice technical analysis, try and predict the actions of security costs by charting and studying the different variables at work within the market. They believe performance is largely cyclical and reliant on outside forces that can be determined.

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What Is The Purpose Of Technical Analysis