WHAT IS TECHNICAL ANALYSIS , HOW IT IS DIFFERENT FROM FUNDAMENTAL ANALYSIS

Technical Analysis is a method of evaluating future security prices and market directions based on statistical analysis of variables such as trading volume, price changes, etc., to identify patterns.

A stock market term - The attempt to look for numerical trends in a random function. The stock market used to be filled with technical analysts deciding what to buy and sell, until it was decided that their success rate is no better than chance. Now technical stock analysis is virtually non-existent. The Readers Submitted Examples page has more on this topic.

Research and examination of the market and securities as it relates to their supply and demand in the marketplace. The technician uses charts and computer programs to identify and project price trends. The analysis includes studying price movements and trading volumes to determine patterns such as Head and Shoulder Formations and W Formations. Other indicators include support and resistance levels, and moving averages. In contrast to fundamental analysis, technical analysis does not consider a corporation's financial data.

Technical analysts study trading histories to identify price trends in particular stocks, mutual funds, commodities, or options in specific market sectors or in the overall financial markets. They use their findings to predict probable, often short-term, trading patterns in the investments that they study. The speed (and advocates would say the accuracy) with which the analysts do their work depends on the development of increasingly sophisticated computer programs.

Technical Analysis supposes markets have memory.If so, past prices, or the current price momentum, can give an idea of the future price evolution. Technical Analysis is a tool to detect if a trend (and thus the investor's behavior) will persist or break. It gives some results but can be deceptive as it relies mostly on graphic signals that are often intertwined, unclear or belated. It might become a source of representiveness heuristic (spotting patterns where there are none)

Technical analysis has become increasingly popular over the past several years, as more and more people believe that the historical performance of a stock is a strong indication of future performance. The use of past performance should come as no surprise. People using fundamental analysis have always looked at the past performance of companies by comparing fiscal data from previous quarters and years to determine future growth. The difference lies in the technical analyst's belief that securities move according to very predictable trends and patterns. These trends continue until something happens to change the trend, and until this change occurs, price levels are predictable.

There are many instances of investors successfully trading a security using only their knowledge of the security's chart, without even understanding what the company does. However, although technical analysis is a terrific tool, most agree it is much more effective when used in combination with fundamental analysis.

Fundamental Analysis

Fundamental analysis looks at a share’s market price in light of the company’s underlying business proposition and financial situation. It involves making both quantitative and qualitative judgements about a company. Fundamental analysis can be contrasted with 'technical analysis’, which seeks to make judgements about the performance of a share based solely on its historic price behavior and without reference to the underlying business, the sector it's in, or the economy as a whole. This is done by tracking and charting the companies stock price, volume of shares traded day to day, both on the company itself and also on its competitors. In this way investors hope to build up a picture of future price movements.

Stock Market Technical Analysis

Technical Analysis is the study of prices and volume, for forecasting of future stock price or financial price movements.Technical analysis can help investors anticipate what is "likely" to happen to prices over time.

Technical analysis is not an exact science. It's an art and takes considerable experience. But don't worry everyone with each knowledge can learn it.

Basic Principles

Technical Analysis is based on these three basic principles:

#1 - Price Discounts Everything

Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis. After all, the market price reflects the sum knowledge of all participants, including traders, and �

Stock Market Technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future.

#2 - Prices Move in Trends

Technical analysts or chartists believe that profits can be made by following the trends. In other words if the price has risen, they expect it to continue rising; if the price has fallen, they expect it to continue falling. However, most technicians also acknowledge that there are periods when prices do not trend.

#3- History Repeats Itself

Technical analysts believe that investors en masse repeat their behavior and they assume that there is useful information hidden within price histories; that it is a way of analyzing the past actions of people in a particular market as reflected by their actual transactions.

Technical Analysis Tools

Every technical analyst needs charts and indicators to study market. Three common types of charts are used by investors: Line Chart, Bar Chart and Candlestick Chart.

Line Chart is formed by plotting one price point, usually the close, of a security over a period of time. Connecting the dots, or price points, over a period of time, creates the line.

Bar Chart is drawn by high, low and closing price. Sometimes, bar charts are drawn by opening price. In this case, bearish bars are drawn with another color.

Candlestick Chart A form of Japanese charting that has become popular in the West. A narrow line (shadow) shows the day's price range. A wider body marks the area between the open and the close.

Technical Indicators

Technical indicators are the basis of technical analysis. There are dozens of technical indicators, how to choose good stock indicators? Technical indicators are used to know when to enter or exit a trade. If you know how to enter and exit a trade, you can easily make profits. That is why choosing good stock indicators are important.

Some of stock indicators are more common and useful than others. Also you need a few of them to know when to enter or exit a trade not all off them.

Technical indicators can be divided into four major categorizes:

1- Price Indicators: Oscillators,Bollinger Bands
2- Trends
3- Number Theories: Fibonacci numbers, Gann numbers
4- Waves:Elliott's wave theory

Price Indicators are computed by prices data. A subcategory of Price Indicators are oscillators. Oscillators are indicators that are usually computed from prices and tend to cycle or �oscillate� within a fixed or limited range.

Common oscillators are: Momentum and Rate of Change (ROC), Moving Average Convergence/Divergence (MACD), Relative Strength Index (RSI), and Stochastic Oscillator.

Momentum and Rate of Change (ROC)

Momentum is an oscillator designed to measure the rate of price change, not the actual price level. This oscillator consists of the net difference between the current closing price and the oldest closing price from predetermined period.

The formula is:

Momentum (M) = CCP � OCP

Where: CCP is Current Closing Price and OCP is Old Closing Price

Momentum is simply the difference, and the ROC is a ratio expressed in percentage. Momentum and Rate of Change (ROC) are simple indicators showing the difference between today's price and the close N days ago. Momentum in general term means strongly movement of prices in a given direction.

Moving Average Convergence/Divergence (MACD)

MACD is computed by subtracting a longer moving average from a shorter moving average. MACD is used with a signal or trigger line, which is a moving average of MACD. If MACD and trigger line cross, then this indicate that a change in the trend is likely. MACD developed by Gerald Appel.

The MACD smoothes data, as does a moving average; but it also removes some of the trend, highlighting cycles and sometimes moving in coincidence with the market .

Relative Strength Index (RSI)

RSI measures the relative changes between up-moves or down-moves and scales its output to a fixed range, 0 to 100. RSI is an oscillator and Welles Wilder devised it.

The formula for calculating RSI is:

RSI = 100 � [100/ (1+RS)]

Where: RS is average of N days up closes, divided by average of N days down closes and N is predetermined number of days that usually chosen 14.

RSI can use as an overbought/oversold indicator. A buy signal is when the RSI moves below a threshold, into oversold territory, and then crosses back above that threshold, usually 30 is taken for oversold threshold. A sell is signaled when the RSI moves above another threshold, into overbought territory, and then crosses below that threshold, usually 70 is taken for overbought threshold.

Technical Indicators - part 2

In this page you will be familiar with two indicators: an oscillator that is Stochastic Oscillator and Bollinger Bands indicator.

As I mentioned before, Oscillators are technical indicators that tend to cycle or �oscillate� within a fixed or limited range, and Momentum in general term means strongly movement of prices in a given direction.

Stochastic Oscillator

The Stochastic Oscillator is a momentum indicator, it indicates whether the market is moving to new highs or new lows or is just meandering in the middle. This indicator is based on George Lane 's observations.

The Stochastic Oscillator is plotted in two lines Fast %k and Fast %D.

The formula is:
Fast %k = 100 * [( C � L (n) ) / ( H (n) � L (n) )]

Where:
C is the most recent closing price.
L (n) is the low of n previous trading day (or bar).
H (n) is the high price of the same n previous day (or bar).

Usually n is chosen 14.

A 3-period (day or bar) moving average is taken from Fast %k and called Fast %D. Fast %D is used as a signal line in the same way that the moving average of the MACD is used as a signal line for the MACD.

Stochastic Oscillator is plotted in two lines but, usually these lines cross each other many times. Now to smooth the chart, a 3-period moving average is taken from Fast %D and called Slow %D (Also, Fast %D is called Slow %K), so the smoothed chart is plotted with Slow %K and Slow %D.

Using of Stochastic Oscillator

1- Oscillators are used as an overbought/oversold indicator. A buy is signaled when the oscillator moves below 20, and then crosses back above 20. A sell is signaled when the oscillator moves above 80, and then crosses below 80.

2- Also, when %K crosses above or below %D, Buy and sell signals can be given. But, may be crossover occurs frequently in short periods and causes bad results. This using isn't very common.

Bollinger Bands

John Bollinger created Bollinger Bands in the 1960s; Bollinger Bands are used to determine support and resistance levels. This indicator consists of three lines; the middle line is an exponential moving average of price data and the two outside bands are equal to the moving average plus or minus standard deviation.

Standard Deviation is a statistical measure that indicates volatility of price. The bands will expand when price becomes volatile and they will contract during less volatile periods.

Using of Bollinger Bands

1- Bollinger Bands are used to determine the boundaries of market movements. If a market moved to the upper band or lower band, then there was a good chance that the market would move back to its average. In the other words, when price closes to upper band, market is overbought and when price closes to lower band, market is oversold.

2- Another using of Bollinger bands is that to indicate up-trends and down-trends. If price deflects off the lower band and crosses above moving average then price fluctuate between upper band and moving average, it comes to indicate upper price target. It is visa versa to indicate lower price.

Learn basics about Fundamental Analysis

The definition of Fundamental Analysis

What is Fundamental Analysis ?

Fundamentals are associated with the economic health of a company, measured in terms of revenues, earnings, assets, liabilities, Return on Equity (ROE), Return on Assets (ROA), Return on Investments (ROI), growth prospects and cash flows, etc. The fundamentals tell you about a company. You can say a company is having robust fundamentals if it is growing at a nice pace, generating a profit, has limited debts and abundant cash.

The analysis of a company's fundamentals involves getting deep into its financials, rather than day-to-day movement in its share price. Equity researchers normally do fundamental analysis in order to calculate the intrinsic value of a company's stock. If a company's stock is trading above the intrinsic value or fair value, then the stock is overvalued. If a company's stock is trading below the intrinsic value, then the stock is undervalued. However, if you watch the stock markets very closely, the share price of most companies never matches the fair value. Often, day traders and investors who would prefer short term investment options invest in those stocks, regardless of the companies' long term growth prospects. However, long term investors generally prefer to invest in companies with robust fundamentals and ignore near-term share price movements.

The following are various components that constitute a company's fundamentals:

Revenues: Revenues (sales) are the total amount of money received by a company through the sales of its goods and services during a specific period of time. Revenues are one of the most important barometers of the growth of a company as it indicates whether there is demand for their products and services.

Cash flows: Cash flows are calculated by deducting a company's cash payments from cash receipts over a particular period of time. Cash flows indicate the liquidity position of a company. However, one must pay particular attention to the operating cash flows, since the health of the business can be most clearly seen there.

Net income: Net income, which is also called the 'bottom line', is calculated by subtracting from revenue, all of the company's costs, such as operating costs, interest expenses, depreciation, taxes and other expenses associated with running the business.

Balance Sheet: Balance sheet is the company's financial statement, which reflects its assets and liabilities. A company's fundamentals are said to be robust if its assets are significantly higher than the liabilities. However, one must carefully analyze companies who are reporting large intangible assets as they may have questionable liquidation value to offset any real liabilities.

Return on Assets (ROA): ROA is an Indicator of a company's profitability, which is calculated by dividing the net income for the past 12 months by total average assets of the company. This is one of the important indicators, which long-term investors consider before investing into a particular stock.

Although long-term investors and institutional investors consider a company's fundamentals before investing, the share price of a company often does not correspond to the fundamentals - which can present enormous investment opportunities. A company's long-term growth is driven primarily by fundamentals, while a company's share price can be driven by short-term news and investor sentiment, which can be extremely volatile. Every investor must consider a company's fundamentals before investing into its stock if you want to gain stable returns over the long term.

Fundamental analysis is a stock valuation method that uses financial and economic analysis to predict the movement of stock prices.

The fundamental information that is analyzed can include a company's financial reports, and non-finanical information such as estimates of the growth of demand for competing products, industry comparisons, and economy-wide changes.

Main Strategy

To a fundamentalist, the market price of a stock tends to move towards its intrinsic value. If the intrinsic value of a stock is above the current market price, the investor would purchase the stock, and if the intrinsic value of a stock was below the market price, the investor would sell the stock.

To start a fundamentalist makes an examination of the current and future overall health of the economy as a whole. In this step you should attempt to determine the direction and level of interest rates.

After you analyzed the overall economy then analyze firms individually. You should analyze factors that give the firm a competitive advantage in its sector such as management experience, history of performance, growth potential, low cost producer, and etc.

Some expressions of Stock Fundamental Analysis

For beginning I describe some stock fundamental analysis expressions that are more important:

#1- EPS: (Earnings Per Share)

The portion of a company's profit allocated to each outstanding share of common stock. The amount is computed by dividing net earnings by the number of outstanding shares of common stock. For example, a corporation that earned $10 million last year and has 10 million shares outstanding would report earnings per share of $1.

#2- P/E Ratio: (Price/ EPS)

Also called its "earnings multiple", Price of a stock divided by its earnings per share. The P/E ratio may either use the reported earnings from the latest year or employ an analyst's forecast of next year's earnings. P/E gives investors an idea of how much they are paying for a company's earning power.

An important notice here is that the P/E ratio is ultimately not an objective measure; a high P/E ratio might show an overvalued stock, or it might reflect a company with high potential for growth.

#3- Dividend

Dividend is an amount of the profits that a company pays to people who own shares in the company. When a company earns a profit, some of this money is typically reinvested in the business and called retained earnings, and some of it can be paid to its shareholders as a dividend.

#4- Book Value

The book value of an asset or group of assets is sometimes the price at which they were originally acquired ( historic cost ), in many cases equal to purchase price.

#5- Growth Stocks

Growth Stocks in finance , are stocks that appreciate in value and yield a high return on equity (ROE). Analysts compute ROE by taking the company's net income and dividing it by the company's equity. To be classified as a growth stock, analysts expect to see at least 15 percent ROE.