Technical Analysis Tutorials

• What is technical analysis?

Technical analysis is the study of past price movement of a certain share, index, or of the stock market as a whole. Price charts are the main tool for analyzing the technical picture of a share or stock. The primary idea behind technical analysis is that all information; buying, selling, rumors, economic news release etc., is going to be factored into the price of a share as market participants receive and process that information.

Through analyzing share charts we are able to see whether positive news is associated with a company, because if there is good news, or expected good news, than the result will likely be rising share prices and bullish momentum. We can also tell if negative news has been released, or expected to be released, because if this is the case sellers will likely come into the market and drive prices lower. Reading price charts is a necessary skill to learn if you want to become a successful investor, while fundamental analysis is very important in stock trading, skill at reading a price chart can greatly influence your long-term returns in the market.

Many people mistakenly believe that they can predict the future by reading a price chart, forget this idea, it is not possible, nor is predicting the future of a stock possible with fundamental analysis.

• Benefits of technical analysis

So if learning to read a price chart isn’t going to allow you to predict the future of a stock and get rich overnight, then what exactly is it good for? Besides allowing you to see how the market is reacting to a specific news release, technical analysis gives you a visual representation of the supply and demand situation for any company you are interested in. It can often be much easier to consult a simple share chart than to spend hours trying to analyze balance sheets, price to earnings ratios, and other fundamental factors. However, it is best to combine both technical and fundamental analysis to obtain a complete picture of the overall growth prospects for any company you are considering buying shares in.

Another huge benefit in learning how to properly analyze the price chart of a specific stock is that it can add a lot of money to your long term investing results by helping you time your entries and exits. While the long term business fundamentals of a company might be very solid, there are still ebbs and flows that occur each day in the share market, so it is important to time your entries and exits as accurately as possible in order to save yourself from having to deal with an investment moving substantially against you before it becomes positive. Technical analysis is especially important if you are a beginning stock investor or trader who is not starting out with a very large account value. If you become a skilled chart technician than you will be able to trade more shares in a company because you will know how to enter a position at such a time when the market is getting close to resuming the trend, in this way you can take a larger position while still keeping your risk under control.

Next in our technical analysis tutorials series we will begin to cover the various chart forms used in the share market.