In my last post I talked to you a about a dividend based investing strategy called the dividend growth model.
As promised, I am back today to give you a little background on technical analysis and stock trading. In order to get a grasp on technical analysis, we must first define some of the key terms that are used in the world of technical analysis.
Let us first start with the definition of technical analysis itself:
Technical analysis is based on the price patterns and charts of the stock and not itâ€™s intrinsic value. A technical analyst believes that past price patterns and volume activity are indicative of future movement in the stock price.
Investopedia gives a very good example of the difference between fundamental investors and technical investors:
In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, his or her decision would be based on the patterns or activity of people going into each store.
Technical analysis involves the identification of different chart patterns that are developed through recognized price and volume indicators. Examples of the these various chart patterns include: Cup with Handle, Gap Ups, Gap Downs, Wedge Formations, Saucer with Handle, head and shoulders and many others.
Example of these patterns can be found at Market Stock Watch.
Many technical analysts use a variety of indicators in conjunction with each other in order to forecast the future direction of the stock price or trends. Some indicators that technical analysts use include moving averages, the relative strength line, new highs and new lows, point and figure charts and other indicators.
Obviously this subject is very intense and will need to cover more than one post.
In fact, an entire site dedicated to this subject would be appropriate.
I will be back later with more information and examples of technical analysis in action.