Stock Market Technical Analysis

Posted on March 21, 2008
Filed Under Trading Tools |

Just what is Technical Analysis? Well, John Murphy defines TA this way:

“Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends.”

This is completely opposite from Fundamental Analysis which is practiced by people like Warren Buffet where a company’s financial statements (among other things) are closely studied and investment decisions made after careful evaluation.

P/E ratios, dividends, balance sheets, market share, etc. have no place in stock market technical analysis where the only thing that really matters is the price action of the market in question.

It’s all about the price and where one thinks it is headed. All indicators used to help us try and make an educated guess about where a stock is headed are based on price (and sometimes volume).

Does fundamental analysis work? Yes, but it is a totally different mindset from technical analysis.

Does technical analysis work? While many people in the financial industry will state that TA does not work and will point out things like the random walk theory or efficient market hypothesis the fact remains that there are many successful traders using technical analysis to make money in the stock market today.

As TA based traders we look for repeatable patterns in the market that we can exploit to our advantage. This is called an edge and if you don’t have a trading methodology with a definable edge you will probably lose money trading.

In fact, I have my trading structured to where I get a list of symbols (names) with entry and exit prices each night and I place my trades without any regard as to what any of the companies even do.

I don’t care because I have systems that have been properly backtested on historically accurate data that exploit a repeatable edge that will over time make me money.

In fact, trading is boring but you know what? When you can say that the actual act of trading is boring you know you are doing it right. You are following your rules and letting your systems tell you what to do without you getting emotionally involved or second guessing them.

Now, in order to use technical analysis you need to understand the basics. Things like defining trends, support and resistance, moving averages, RSI, etc. should become second nature to you.

You need to read and study about all of these things just like you would if you were in college. You need to understand what drives the markets and how the various indicators like moving averages are constructed and how to properly use them.

If it sound like this is going to be work you are right, it will be but if you are really interested in becoming a trader you will have fun learning everything (at least I did).

If it sounds boring and time consuming then maybe trading isn’t for you. Put your money in a mutual fund or buy one of the flashy black box trading systems where you just push a button and get your trades.

Just don’t be too disappointed when you fail to make money :)

Buy some of the recommended books and start reading and learning and you will be far ahead of the crowd.

Comments

Leave a Reply




  • Pages