Technical analysis is a method of examining the stocks and securities by studying statistics generated by market influences, historical trends and probability. Unlike financial analysis wherein a company’s value is estimated by analyzing its characteristics, technical analysis focuses exclusively on the price movements in the market. This kind of appraisal document is thus framed maintaining all the factors associated with the variable parameters. Some of the important factors that support a technical analysis are as follows.
- The chief concern of technical analysis is the prediction of price of securities depending on historical data of market activities like volume and prices.
- Believing on the principle that the historical trends of stock performances can be used to predict future performances, technical analysis also studies the patterns of supply and demand in a market to sketch the path in which the trend would go in the future.
- The process of technical analysis incorporates both the principles of behavioral economics as well as quantitative analysis in its techniques. It primarily thrives on the hypotheses that the behavioral patterns of investors are repetitive. Therefore, instead of worrying about the intrinsic value of the product, technical analysts concentrate on its past performances, the probability of its reception among the investors and thereby chart the course of its future trends.
- The task of a technical analyst is to probe into charts, trend lines, moving averages in order to identify patterns that would suggest future activities and present an informed opinion about it on the analysis document. This informs prospective investors on the current market scenarios and thereby enables them to decide on the investments that would be most beneficial to them.
Although their efficacy is contested by efficient market hypothesis on grounds of the unpredictability of stock markets, technical analysis still finds its use in pit trading, foreign stock markets, day trading and market making.