5.8.2. Technical analysis
The aim of the technical analysis is to identify stocks that are candidates for purchase or sale, and the investor can employ technical analysis to define the time of the purchase or sale. Such analysis is used not only for investigation of common shares, but also in the trading of commodities, bonds, and futures contracts. This analysis can be traced back to the seventeenth century, where it was applied in Japan to analyze the trend in the price of rice. The father of modern technical analysis is Charles Dow, a founder of the Wall Street Journal and its first editor in the period of 1889 - December 1902.
Technical analysis ignores company fundamental information, focusing instead on the study of internal stock market information on price and trading volume of individual stocks, groups of stocks, and the overall market, resulting from shifting supply and demand. Technical analysts believe that stock markets have a dynamic of their own, independent of outside economic forces.
Concept
Technical analysis – a forecasting method for asset prices based solely on information about the past prices.
Technical analysis is aimed to determine past market trends and patterns from which
predictions of future market behavior are derived. It attempts to forecast short-term price
movements. The methodology of analysis is based on the belief that stock market history
tends to repeat itself. If a certain pattern of prices and volumes has previously been
followed by particular price movements, it is suggested that a repetition of that pattern will be followed by similar price movements.
Question
What is technical analysis? Why is there a difference between technical analysis and efficient markets?
The study of past patterns of variables such as prices and trading volumes allows investors to identify times when particular stocks (or sectors, or the overall market) are likely to fall or rise in price. The focus tends to be on the timing of purchases and sales.
H. Levy has suggested that technical analysis is based on the following assumptions:
1. The market price of securities (such as shares and bonds) is determined by supply and demand.
2. Supply and demand are determined by numerous rational and irrational factors. These include both objective and subjective factors.