The knowledge of technical analysis is one of the essential stock basics for active trading in the stock market. Technical analysis is a tool used to appraise stocks and predict the likely future movement by studying the statistics collected from trading activities.
Technical analysis does not analyze the basics of a company; rather, it predicts the future price of a stock using past prices and charts. The stock charts reflect the price movement and volumes of stocks traded over time.
Technical analysis is based on the assumption that past trading activities and price changes of stock are the best factors for consideration in predicting the future movement of prices and the value of the stock.
There are several bases for technical analysis, and they are:
1. Prices of stocks are determined by the forces of demand and supply
2. Both demand and supply result from rational and irrational behaviors
3. Prices move in trends and the trends tend to exist long-term or repeat over time
4. Changes in demand and supply can be identified by analyzing the behavior of the stock price.
This assumption believes that the price of stock at any given time clearly reflects and captures every available information and that it reveals the real value of security. It goes further to reveal the total knowledge of every market participant.
The second fundamental assumption behind technical analysis is that the price changes have a pattern or trend both short-term and long-term. These trends can be identified, and they guide in making an investment decision and make a profit.
Technical analysis is used to analyze and forecast the price changes of almost any tradable tool that is subject to the forces of demand and supply, such as stocks, bonds, etc. Technical analysis can be explained in simple terms as the study of forces of demand and supply as revealed in the market price movements of a stock. Although it is usually applied to changes in price, other data like the trading volume can be tracked from it.
In a bid to create different trading strategies in the stock market, several technical indicators have been developed to forecast future price changes accurately and determine the strength of a trend. The primary purpose of technical analysis is to guide in making certain decisions.