Technical Analysis And Stocks: The Connection

In making determinations as to what the stock markets worldwide are going to do in terms of how prices move, there are two distinct schools of thought about analysis of companies and their investment prospects. The typical school of thought, and one that has been successful over the last decades has been the school of fundamental analysis.

Fundamental analysis views not only the financial opportunities of a company, but also the likelihood of accomplishing these goals in respect to their competitors. Technical analysis, on the other hand, has been successful in use, but not very structured or scientific. Thus, the question again arises, what is the connection between stocks and technical analysis?

Simply put, technical analysis studies past trends in the market. These trends are then used to help figure out what a future of a stock’s price may be. However, this entire question with regard to the connection between stocks and technical analysis is still unanswered. What allows people to think that the price of stocks can be predicted by just looking at graphs and chart? Doesn’t the companies overall condition and its financial outlook help in determining or predicting stock prices?

The primary reason that technical analysis is used by some market analysts is because it can be used subjectively. The analysts can downgrade a stock and or anticipate higher earnings. One would think that from a statistical standpoint, a regular trading day would only be swayed by the daily activities and independent of anything else that has previously occurred. The truth is that over time market movements occur and trends develop. The movements made and the events that occur are not really isolated at all to one day, but are usually cumulative over a period of time.

Therefore, technical analysis makes use of a lot of diverse data, including trading volume charts, old stock quotes, and much more. This data is then in turn used to look at particular issues which help in developing graphs and charts. These then help in determining the length of the impact of a move in a company will endure and also the outcome that it has on stock market trading.

When compared to each other, fundamental analysis and technical analysis of the same stock market gives much different results. Fundamental analysis is considered a long term or \”long\” predictor in markets. Technical analysis is considered a short term or \”short\” predictor in markets.

Overall, technical analysis is more detailed due to the large amount of terminology used which describes existing trend lines and graphical shapes. Typical investors without the knowledge needed can be easily discouraged when trying to comprehend this type of data. For example many terms used to describe trends are ambiguous and used interchangeably (e.g. elbow, shoulder). This can denote upswings or downswings with leveling off at intervals. This can make it harder for interpretation.

Overall, those who are familiar with investing still question, \”Technical Analysis vs Stocks…Is there a connection?\” in regard to how can these types of analysis can be used everyday. Honestly, the fact that technical analysis is very subjective to the person who uses it, including being a bit imprecise brings concern. Fortunately, since it has been successful on the whole, this tool is still arguably a good one to use for market analysis.

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