Technical Analysis

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Category: Business and Industry

Date Submitted: 09/19/2011 09:49 AM

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One of the well-known methods used to evaluate, analyze and make investment decisions is technical analysis. Technical analysis forecasts movement of future prices by using the past information, particularly volume and price. Technical analysis assumes that price moves in trends and that history repeats itself. In other words, this method studies supply and demand in the market and tries to comprehend how the market behaves. In this paper I am going to discuss major points of technical analysis. Firstly, I will introduce on what presumptions technical analysis is founded, and then how and what types of charts technicians use in their valuation. The next point to discuss will be support and resistance in technical analysis, followed by comparison of fundamental and technical analysis. Furthermore, this paper will consider the relationship between efficient market hypothesis and technical analysis. Finally, some strengths and drawbacks of using technical analysis method will be discussed.

Main body

Technical analysis based on three wide-known assumptions. The first one says that the market discounts everything. Technical analysts are confident that the current share price fully reflects all information. Because all information is already reflected in the price, it represents the fair value. Analysts confirm that the information from the financial statements of the company and economic factors are all reflected in the price of the stock; consequently there is no need in undertaking these factors separately. What is left is to analyze price movement, specifically exploring the supply and demand for a particular stock in the market. The second assumption suggests that stocks do not necessarily priced randomly. In technical analysis, it is considered that prices move following trends, meaning that when trend has been identified, it is tend to be in the same direction in the future. Many inventors use this as a base for their trading...