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1. What is technical analysis?
Technical analysis attempts to use past stock price and volume information to predict future price movements. It also attempts to time the markets.
2. Does it have any chance of working at all?
This is a question asked more out of ignorance. Since technical analysis addresses the market, it is actually studying the effect of action by all kinds of players. We know it to be a simple stated fact that all effects are rooted in some cause. The simple premise is everybody knows something about something but the market knows everything about everything. This is because the market is the sum total of all the players. Hence the market is the true reflector of all news and views of every conceivable player. Close study of effects will reveal a consistent pattern which remains consistent through time. A good understanding of these underlying dynamics of market behavior will ensure that it works all the time.
3. Does technical analysis work in all markets?
Since technical analysis deals with the market and not geographical areas, it will work in any free trading financial markets anywhere.
4. I am a fundamentalist. Should I know anything about technical analysis at all?
Fundamental analysis addresses all variables outside the market whereas technical analysis deals with variables within the market. The objective of both forms of analyses is the same – it is to find future direction of stock price movements. Only the means of achieving the same differs. One of the major advantages in learning technical analysis is that it enables one to deal with market risk – this is one important area which is completely ignored by fundamental analysis. It is only technical analysis which can give one an insight into Market risk. Hence a good knowledge of both technical and fundamentals would produce a more rounded, well informed, investor.
5. Can technical analysis be called a self-fulfilling prophecy?
It is true that common signals generated by technical analysis can be self fulfilling and pushes the price of a security higher or lower, reinforcing the strength of the signal. That said, it is likely this may last only for a short time. Because the goals of participating investors and traders are different and there are hundreds of indicators informing these market players- not to mention fundamental forces that drive prices - it becomes nearly impossible for technical analysis to be self fulfilling in the long run. If enough people use the same signals, they could cause the movement foretold by the signal, but over the long run this sole group of traders cannot drive price.
6. Is technical analysis used only to analyze stocks?
The simple answer to this question is definitely not. This form of analysis can be applied in more situations than you may think. Any time a person uses past data to predict the outcome of a future event, he or she is using technical analysis.
Technical indicators, trends and moving averages can be used to analyze the direction of bonds, mutual funds, indexes, interest rates, exchange rates, jobless claims, housing starts and the weather. They can even be used to forecast the prices of futures such as oil, propane, gold, corn, soybeans, etc. The use of technical analysis is not limited to what we have mentioned here, but this should give you a good idea of the many things to which it can be applied.
7. There are so many theories in technical analysis. How do I know which one works the best?
The many theories in technical analysis are all the result of consistent and ongoing work in the subject. In essence, they are a series of different ways of looking at the same set of variables – price and volume. It is a bit like a jigsaw puzzle. Each different view point is a piece which when finally put together produces a complete picture. There really isn’t one method which would work all the time in all the market conditions. One has to pick and choose the method to suit the market, sector and stock.
8. Can I create my own charts or own technical indicators?
Consistent development in the field of technical analysis (or indeed any field for that matter) occurs because people manage to get out of straight jacketed thinking and begin cutting radical new paths. Without original thought, there can be no further progress. Hence there is really no limit what one can create.
9. Is technical analysis and charting the one and the same thing?
Charting is really one element in technical analysis. The title is a bit of a misnomer, actually. John Murphy, renowned author in the subject has put it better, calling it Visual Analysis rather “technical” analysis. One is really addressing the market as a whole and therefore one is actually analyzing the action of so many different types of investors. A technical analyst is therefore doing something beyond only charting the stock prices. He goes into the very minds of people involved through the medium of the charts.
10. I have no idea about technical analysis. Where can I learn technical analysis?
Fortunately today, the availability of information on the subject is considerably more than what it was some years ago. This in itself testifies to its growing popularity. Books are available from some of the leading book stores in major metros. The books range from simple introduction to complex subjects. One can also learn Technical analysis from the courses conducted by various Institutes.
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