What is Technical Analysis?

Japanese Candlesticks display a trend reversal.

Japanese Candlesticks display a trend reversal.

It is one of two disciplines (the other being Fundamental Analysis) to evaluate the performances and prospects of securities listed on the stock-market.

It uses price and volume data over a range of time frames. The price data includes open and close prices for the period, as well as the highest and the lowest traded prices. Volume is measured in both the number of shares traded, and their value for the period.

The raw data should be exact, and the computerized statistical manipulation  scientifically sound.  Although historical, the data can be current with literally only seconds in delay. The analyst can choose from a range of chart formats how best to display the results. The weak link is the interpretation of the findings, influenced as it is by observer bias, knowledge and skill. For this reason it is often said that technical analysis is more of an art than a science.

It is true to a limited extent that “history repeats itself”. Historical data may  be a guide to future price action, but since it will be the outcome of the continuing trading decisions of market participants, it is always unknowable. Participants are motivated not only by facts but also by fickle market sentiment.

A key objective of chart analysis is to establish the presence and direction of price trending. This is the secret to profitable investing be it short or longer term.The logo above displays in Japanese candlesticks, a trend reversal which commences with a bullish engulfing pattern, in which the first green candlestick after a downwards sequence  engulfs the last of the red candle-sticks.

2 replies

  1. I find it very sad when “investors” make investment decisions based on some wimsical notion that a stock is cheap, or their financial adviser recommended it, or because the “feel” that it is due for a share price improvement.

    If only the regular “investors” would also utilise some basic Technical Analysis, and make sure that an uptrend is in place, and emply a Stop Loss to capture profits and limit losses, then they would be a lot better off.

    It is especially sad when the so-called professional commentators bag Technical Analysis as useless, or claim it has been disproved.

    Sound implementation of Technical Analysis and sound risk management methods are the way to go.

    Keep up the good work Ken.

    Robert B

    • It was good of you Robert to take a look at my blog and make such a valuable comment. I really appreciate it coming from one who has been posting such good material for so long. I was most impressed with your website and would appreciate being able to re-blog your posts from time to time.

      You do pin-point a personal weakness of mine, in looking for cheap over-sold turn-around stocks; following the prolonged post-GFC bear market there has been no shortage of such stocks from which to chose. TA has been a help to me in doing this eg looking for evidence of institutional accumulation, and the onset of break-outs.

      I also contribute to the web-site Ten Bags Full which provides research and communication tools for sifting through detailed technical data, and sometimes obscure information focusing on penny-dreadful stocks. It features a clever little widget for following Predictions. With it I have been able to follow the outcomes of Predictions (or adumbrations as I prefer to call them) I have made on the basis of TA. Pleasingly there has been a high success rate. I would love to hear your comments should you have the inclination to take a look at it.

      Thanks again. Regards,

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