Technical analysis

Technical analysis of shares means that quantitative data is used to predict the future price of a share. The main quantitative data is the chart of the historical price development. A trend in the chart is searched, after which the future prices is predicted. This is done by adding a top line (resistance) and a bottom line (support) to the chart. Both lines do not have to be horizontal lines, but can also be draw into the chart diagonally. Also the tops and bottoms for shorter and longer terms can be taken into account.

Another indicator that can be added to the chart is the moving average. This indicator gives the average price for the last X number of days back, whereby the X can be defined by the technical analyst. This indicator shows the trend of the price quite accurately, because it shows the how the current price relates to the prices in the short-term history in one glance. It shows whether the current price is above or below the short-term mean price, and whether the price is going up or down in respect to the moving average.

Besides the indicators which lead directly from the chart, other indicators are of interest when performing a technical analysis. So is the trade volume of a certain share an important indicator whether the trend, which is recognized in the chart, is widely supported. From this can be deduced whether a change in the number of traders can have a great impact or not. When the volume is relatively high, the expected impact should be little. When the volume suddenly deviates from the volume of the day before, a trend change can be expected.

There are many other technical analysis indicators, which are all directly or indirectly derived from the price of a share. Usually an indicator consists of a combination of several more simple parameters, such as moving average, volume and price. In addition, the visual benefits that charts offer are frequently used in technical analysis. frequent use of the visual benefits that gives a graph by drawing several lines. This can be a relatively simple and concise way to try to predict the future.

Technical trends

Technical analysis has nothing to do with the actual value of a company and should therefore only be used to identify trends on the short-term which predict share prices. Since short-term prices are very dependent on the human psyche and the prevailing expectation of investors, technical analysis can certainly be used. In addition, technical analysis is used by many investors, both small and large, to support their investment decisions. Because there are many standard technical analysis indicators, most of the investors will emerge with the same trends. This will strengthen the trend. Technical analysis therefore looks like a self fulfilling prophecy.

However, when the prevailing trend changes, quick action must be taken before all investors which use technical analysis find out what happens. The faster the technical analyst sees the changing trend, the sooner he can act on this.

In short, technical analysis of shares is a convenient and certainly useful part of the support for investment decisions, but only for the short term. Technical analysis can also be used to monitor whether the expected trend is the reality. Technical analysis is therefore mostly supportive and investment decisions must not only be based on technical analysis.

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