What is Technical Analysis?

Starting from this week, I'll post some educational articles on Technical Analysis, so that we can learn together and use the knowledge for 2012!

What is Technical Analysis?

Technical analysis is the study of charts whereby we can make investment decisions based on the following assumptions:

(1) History repeats itself, consequently, past trends predict future ones.

(2) The price pattern is the sum of all the behaviours of the market crowd. Therefore, technical analysis tracks the psychology of the market.

While fundamental analysis helps us to study the financial health of a company, technical analysis gives us an idea as to the direction of the stock price. Very often, a techincal analyst can identify trend changes at an early stage, and act on it.

First we need to know what a stock chart is.

Stock Chart

A stock chart is also known as a price chart. It has two parts to it: the upper portion depicts the price movement, and the bottom shows the volume traded.

Next, we need to understand Volume and Price relationship. There are 4 types of Price-Volume relationships:

1. Heavy Volume with Rising Price

This is a healthy sign in the market. It tells us that there are a lot of trading activities going on and buyers are outnumbering sellers. When volume is heavier than yesterday’s volume, and accompanied by a price increase of at least 1%, it may be signaling a trend reversal from bearish to bullish soon.

2. Heavy Volume with Falling Price

This is a troubling sign as it shows that the investors are bailing out. When volume is heavier than yesterday’s volume, accompanied by a price decline by at least 1%, it could mean warnings and a possible trend reversal from bullish to bearish.

3. Light Volume with Rising Price

Light volume with rising price may indicate that the price is losing steam. The price is going to drop soon, as investors are not willing to pay for the rising price.

4. Light Volume with Falling Price

On the other hand, light volume with falling prices may indicate the price is bottoming out. Investors are holding on to their stocks rather than selling for lower prices.

So, investors should pay attention to signs of heavy volume in the market. Observe the volume together with price trends and you will see important signals sending out to the market crowd.

In addition, when you see a price rise or fall on light volume, it indicates that heavyweight investors are staying on the side lines—thus, it is not as significant.

Try to download the free charting software from Chart Nexus

And practice the 4 types of Price volume analysis on the charts, you'll start to see some lights in technical analysis.

Happy investing,

Pauline Yong