Technical Analysis - Assignment Example

Technical Analysis 1. Technical analysis basically entails forecasting future financial movements of prices on the basis of examination of previous price movements. Just like weather forecasting, technical analysis usually may not guarantee absolute predictions regarding the future. Nevertheless, it can assist investors and traders foresee what is most “likely” to take place to prices in future. 2. Fundamentally technical analysis studies demand and supply in a given market so as to establish what trend or direction will prevail over time. This is to mean that technical analysis tries to comprehend market emotions by analyzing the market itself. 3.Technical analysis aims at detecting shifts in demand and supply trends and assumes that markets are not rational and therefore technical indicators can provide early signals of market irrationalities, effectively taking advantage of them(Kahn, 2009). 4. Technical analysis basically examines the way a company is currently perceived by investors in entirety. This method therefore evaluates securities by studying the supply and demand of an asset or stock on the basis of price studies, recent volumes traded in addition to the selling and buying behavior of traders/investors. Technical analysts therefore do not measure the intrinsic value of the security but instead make use of computer programs or charts to recognize and project future price trends in a security, future or fund market (Kahn, 2009). 5. Fundamentals describe intrinsic values, whereas technicals describe statistics. 6. Top-down analysis is a method that first focuses on the “big picture” and later analyzes features of smaller elements. By first evaluating the overall picture like macroeconomic trend, traders can begin narrowing potential firms to analyze. A rising price trend, volume, strong sector and momentum are all scenarios that can augur well with top-down approach which relies on such scenarios for effective market analysis especially when managing the SIMF (Kahn, 2009). Chapter 1: Required Background 1. When making decisions, investment professionals, frequently evaluate such elementary information as politics, demographics and economics. They review past information and forecast what may likely to happen in future. Nevertheless this does not imply that they are conferring with a magic oracle but rather technically analysing the markets. Such kind of discipline depends on generous quantities of historical prices information which is not only accurate but also readily available for computer application (Kahn, 2009). 2. The key element to becoming a chartist is the ability to make use of graphs and charts of a security’s past levels or prices to predict its future trends. Thus a chartist essentially examines familiar patterns like support and resistance levels in securities in order to trade them at a profit, A chartist will ply his/her trade in all markets where trading of financial instruments is done. 3. It is important to understand trends form a technical standpoint since as a chartist one is obliged to examine past movement of prices so as to make out past trends in price movements. This will assist one to identify a trend, trade or invest on the basis of that trend and make profit with the unfolding of the trend. Since technical analysis is applicable to several different timeframes, both short-term as well as long-term trends can be spotted (Kahn, 2009). 4. Technical analysis allows for nonconformity. Two instances when technical analysis would lead to a contrary opinion include when analysts are focused on prices which implies that they are automatically looking onto the future. To sustain the pace with the market, it becomes sensible to directly look at the movements of price. The other instance is when chartists employs the low, high, close and open when studying the price activity of a given security. 5. The market is a random walk whereas individual stock prices are not because random walk overlooks market realities, in that investors are not entirely rational and that present movement in prices is not independent of past movements. Stock prices are similar to Wiener processes since statistical instances of such procedures and real stock information differs considerably in regard to similarity measure and window size. Thus feature transformations utilized in describing biosignals and audio can as well be used in effectively predicting stock prices which contradicts “random walk” theory. 6. The four main pillars of technical analysis include price, time, volume and sentiment. Price is the most significant of these since loses and profits are measured in differences of prices between sells and buys. Time comprises of seasonality, relationships and cycles between trends and patterns from a duration perspective. Volume includes concepts such as market breadth, trade count, open interest and accumulation together with distribution. Sentiment finally is a more subjective aspect that seeks to solely establish if the participants are tipped excessively far in a single direction (Kahn, 2009). What is technical analysis? 1. Technical analysis basically relies on historical price movements of a given security and makes use of such data in forecasting price movements in the future. A technical analyst frequently approaches securities by use of charts. A well-rounded analyst has comprehensive knowledge not only of technical analysis but also has developed professional analytical skills in addition to being knowledgeable in code of ethics together with the ethical framework within which to work. 2. A market is basically a loose system comprising of economic transactions without a physical facility, of stocks commonly referred to as shares consisting of securities usually listed in an exchange in addition to those traded privately. 3. A “herding mentality” refers to how individuals are influenced particularly by their peers to take on definite behaviors or follow trends. In stock market, herding mentality affects emotions leading to stock market crashes and bubbles. A herd mentality generally tends to start and end with excessive emotions; characterized by frenzied purchasing to initiate a bubble and then panic selling aimed at triggering a crash. This even affects sensible individuals who do not want to be left out making them to dash with the crowd into as well as out of the market (Kahn, 2009). Works cited Read More