Technical Analysis of Stock Trends

Technical analysis is a method used to forecast future trends of stock prices using past market data. It is widely used among stock traders and investment professionals. Technical analysts do not measure the stock's intrinsic value but they use stock market charts to identify patterns and trends that may suggest future price movements.

There are a few different types of charts that can be used in technical analysis. Candlestick charting is one of the oldest methods of technical analysis (invented by the Japanese) and continues to be most widely used today. Many investors prefer using candlestick charts to other types of charts because they are easy to understand and interpret. Candlestick charts allows traders to spot trend changes or strength and weakness of a stock over a given period.

Technical analysis is based on three assumptions:
(1) The market discounts everything. This means that the actual price reflects all available information.
(2) The price movements will follow trends. This means that the past price behavior is likely to be repeated.
(3) The price trends will repeat themselves.

Advantage of technical analysis:
Technical analysis is relatively easier to understand as compared to fundamental indicators which take time to learn and interpret. It is mainly used for short to medium term trading.

Disadvantage of technical analysis:
This approach relies on a single source of information, historical prices. It may not be practical for newly issued stocks with limited historical information available.

* Next: What is Fundamental Analysis?