A technical analysis of securities is a study of past price and volume trends to judge the direction of future price movements of scrips. The movement of share prices follow a random pattern. Bulls and bears run the show. How long each of these phases would last, no one can say for certain. However, investors can resort to technical analysis to arrive at expected movements of stock prices.
Technical analysis assumes that prices take a random walk and one can judge the future price movements based on the past trends. It thus helps investors to take their investment decisions. However, ultimately, it is the market sentiments that determine the prices ruling on the stock floors.
Technical analysis has two main methods - one dependent on intuition and interpretation, the other on analysis of data. Under the first method, analysts interpret price charts depending on the pattern of movement - head-and-shoulders patterns, double-bottoms, flags and pennants etc. These patterns are used by analysts to predict share price movements.
In case of the other method of technical analysis, analysts rely on complex calculations of numbers, to crunch raw price and volume data. After this analysis process, the secondary indicators, i.e., oscillators, moving averages etc, are calculated and used to spot buying or selling opportunities. Analysts use software, scientific methods, complex equations and complex mathematical formulas to derive indicators.
Moving averages
Generally, there are two kinds of technical indicators. One type (including moving averages) is best-suited to track an upward or downward trend. The other (including oscillators) is most useful in tracking sideway movements. Among the trend-following indicators, the best-known is the moving average, which charts the average price of stocks over a period of time. With each new calculation, the oldest observation used in figuring the average is dropped and the most recent is substituted. Thus, a ten-day moving average would be calculated using prices from the past 10 days.
Generally, analysts use 2-3 moving averages to signal when to buy or sell. Then they watch closely to see when the averages begin to cross one another. They can also build moving-average envelopes around prices by adding and subtracting a fixed percentage of the average to itself by, putting 'bands' of a percentage point above and below a y-day moving average. In case a daily price moves out of the band and hence out of the envelope might be interpreted as meaning that the market is headed for an extreme.
Bands
Analysts apply bands (called Bollinger bands) to spot promising trading time windows as the prices move beyond the bands. These bands are also built around a moving average, but the boundaries of the envelope are related to the volatility of the market. When prices are volatile and harder to predict from the previous day's information, Bollinger bands widen. When prices are relatively steady, the bands narrow.
Oscillators
Oscillators are generally used alongside moving averages or other trend-following indicators to improve market timing. These indicators generally fluctuate from one extreme value to another around a midpoint line. In case an oscillator hits extreme values or when an oscillator chart diverges from a price chart, it's a matter of concern for the analyst. Oscillators are of various types. Momentum is a running measure of the difference between the latest price and the price a fixed number of days earlier. Stochastic is an indicator of the level of the current price in relation to the high and low prices over a fixed period.
This indicator is usually graphed as two lines representing the original indicator and it is a three-day moving average. Moving-average convergence divergence (MACD) is an indicator that is based on the difference between a short-term and a longer term moving average.
The result is also averaged and the two are compared. Signals are generated when the two lines cross. The difference between the two lines is called a histogram. Relative strength index compares the price of a stock on up-days over a given period to the price on down-days over that same period. The Larry Williams percentage indicator defines the latest price in terms of its range over a recent period.
This analysis is undertaken by experts in the field. Now we have pre-defined software to take care of most of the aspects of the analysis. However, making an analysis is one part of the story. The real test is how well one reads and uses the analysis to predict the future stock movements.
Technical analysis assumes that prices take a random walk and one can judge the future price movements based on the past trends. It thus helps investors to take their investment decisions. However, ultimately, it is the market sentiments that determine the prices ruling on the stock floors.
Technical analysis has two main methods - one dependent on intuition and interpretation, the other on analysis of data. Under the first method, analysts interpret price charts depending on the pattern of movement - head-and-shoulders patterns, double-bottoms, flags and pennants etc. These patterns are used by analysts to predict share price movements.
In case of the other method of technical analysis, analysts rely on complex calculations of numbers, to crunch raw price and volume data. After this analysis process, the secondary indicators, i.e., oscillators, moving averages etc, are calculated and used to spot buying or selling opportunities. Analysts use software, scientific methods, complex equations and complex mathematical formulas to derive indicators.
Moving averages
Generally, there are two kinds of technical indicators. One type (including moving averages) is best-suited to track an upward or downward trend. The other (including oscillators) is most useful in tracking sideway movements. Among the trend-following indicators, the best-known is the moving average, which charts the average price of stocks over a period of time. With each new calculation, the oldest observation used in figuring the average is dropped and the most recent is substituted. Thus, a ten-day moving average would be calculated using prices from the past 10 days.
Generally, analysts use 2-3 moving averages to signal when to buy or sell. Then they watch closely to see when the averages begin to cross one another. They can also build moving-average envelopes around prices by adding and subtracting a fixed percentage of the average to itself by, putting 'bands' of a percentage point above and below a y-day moving average. In case a daily price moves out of the band and hence out of the envelope might be interpreted as meaning that the market is headed for an extreme.
Bands
Analysts apply bands (called Bollinger bands) to spot promising trading time windows as the prices move beyond the bands. These bands are also built around a moving average, but the boundaries of the envelope are related to the volatility of the market. When prices are volatile and harder to predict from the previous day's information, Bollinger bands widen. When prices are relatively steady, the bands narrow.
Oscillators
Oscillators are generally used alongside moving averages or other trend-following indicators to improve market timing. These indicators generally fluctuate from one extreme value to another around a midpoint line. In case an oscillator hits extreme values or when an oscillator chart diverges from a price chart, it's a matter of concern for the analyst. Oscillators are of various types. Momentum is a running measure of the difference between the latest price and the price a fixed number of days earlier. Stochastic is an indicator of the level of the current price in relation to the high and low prices over a fixed period.
This indicator is usually graphed as two lines representing the original indicator and it is a three-day moving average. Moving-average convergence divergence (MACD) is an indicator that is based on the difference between a short-term and a longer term moving average.
The result is also averaged and the two are compared. Signals are generated when the two lines cross. The difference between the two lines is called a histogram. Relative strength index compares the price of a stock on up-days over a given period to the price on down-days over that same period. The Larry Williams percentage indicator defines the latest price in terms of its range over a recent period.
This analysis is undertaken by experts in the field. Now we have pre-defined software to take care of most of the aspects of the analysis. However, making an analysis is one part of the story. The real test is how well one reads and uses the analysis to predict the future stock movements.