Technical Analysis

Technical Analysis - what on earth is it?
and how can we use it?

The day-to-day and week-to-week performance of companies in the share market depends on the underlying mood and sentiment of all the investors and traders who participate in the market. When a company's share price rockets upward, or dives downward, it is because enough of the market participants have a strong enough view of the stock, or of the market generally, to cause the share price to move. It is their actions of buying and selling. And their purchase decisions tend to be based on an opinion about the value of the shares. It might be a broker's share price valuation (an opinion about fair value), or that of an analyst. Whatever it is, each share trade takes place at a specific price, and this price value is captured and shown in the price chart.

Hence, the statement at the top of this page:
"Price charts summarise the underlying opinions and emotions of the real market participants.
Every chart tells a story, and it pays to understand the stories in the price charts".

Seem too hard? or confusing? In case you are already aware of technical analysis, and perhaps it seems to be a little difficult or confusing, make sure to see the Simple and Practical Applications web page.
Don't believe it? Perhaps you are somewhat sceptical about the idea that there are stories in the price charts that are left behind by the market participants? Look at the chart at right and consider the following observations (click on the chart for a larger version with more details and comments). In this price chart, we can see that in late 2013 there were no buyers of CBA shares who thought the stock was worth more than $80. When the price rose this high in October 2013, sellers stepped in to take profits. [ie. the opinion of market participants was that CBA was not worth $80.] The $80 level was a resistance level. This caused the price to fall away, but trade mostly higher than about $73. So the $73 price level was a floor (or support level) for the price. And for the next few months it traded no higher than $78. [ie. the opinion of market participants was that CBA was worth between $73 and $78 - no lower and no higher.]  This was the case until April 2014 when buyers started falling over each other to buy the stock. This caused the price to push above the $80 level, and keep rising in a strong uptrend. [ie. the opinion of market participants was that CBA was now worth more than $80.]	Weekly price chart of CBA  from October 2013 to May 2014. (Click on the chart for a larger view with more details and comments) The opinion of market participants is captured in the price charts.
Brief Introduction Video Watch a 6-minute "Very brief Introduction to Technical Analysis" video on YouTube:   NOTE: You can also see the full 60-minute version of this video - see the link below. .

Not convinced? See some supporting materials that provide evidence.

Why is it so?

It is the underlying emotions of fear, greed and hope which drive share prices, often based on fundamental data or news stories. And all of these are reflected in the share price charts. The underlying sentiment is reflected in the price charts, and in the volume bars on the chart, and in the relative height of candlesticks on a candle chart, and the presence and length of tails on the individual candlesticks. And successive days or weeks of price movement can form patterns on the chart which also reflect the underlying market sentiment.

"The interpretation of past share prices and volume
(typically on share price charts)
to try to gauge likely future price action."

The field of Technical Analysis is the study and interpretation of the price action of financial instruments (eg. shares, currencies, commodities, bonds, etc.) and the “statistical prediction” of their future behaviour. In Technical Analysis there is a substantial body of knowledge ranging from simple price charts to complex mathematical and computer studies. 

For some tips and guidance to help you get started with utilising technical analysis, see Robert's 4 Windows approach which provides a great check list, as well as an introduction to a number of key aspects of technical analysis.

How is technical analysis useful?

Firstly, it is worth re-stating that the price charts summarise the opinions of the market participants regarding so-called fair value for the share price. The price charts can tell us a story about what “Mister Market” is thinking. It pays to understand the stories in the price charts - this is technical analysis. The more insight we can gain into the share price history, the more we can understand the opinions of the market participants, and the underlying balance of supply and demand for the shares. And this can help give us greater confidence about the more likely scenarios for future price movements. Don’t forget that we are not trying to predict future share prices. We are trying to anticipate the likely future movements so that when a move happens we won’t be surprised by the move.

In it's purest form, the application of technical analysis can involve no consideration of Fundamental Analysis; but the two approaches can be combined - eg. in the Funda-Technical Analysis approach.

People who use technical analysis might invest in shares in the share market, or in currencies (forex), or options, warrants, commodities or other sorts of financial instruments. Thousands of people around the world use this to successfully time the market. Nothing is 100% perfect, but when coupled with the right approach, strategy and money management and risk management methods, one can be very successful and profitable.

The study of technical analysis has been around for many centuries - see History details in Wikipedia.

How can we use simple technical analysis to be profitable?

Okay, so how can we use the simple aspects of technical analysis to: identify potentially profitable stocks, invest wisely, manage the risk, and protect our capital against downside risks? See the details here...

To read more about the key aspects of technical analysis, see the details below.

Not convinced? See some supporting materials that provide evidence.

See the proof

Practical applications
and case studies

• More than 140 ATAA articles in Fairfax newspapers and online.

• Simple practical applications.

• Beware the falling stocks.

• See Robert's contributions to several of the ASX Investor Update newsletters, which cover some of the material at left.
  

• Blue chip stock performance.

More details

• Technical Analysis - Getting Started - for some basic details of how you can use this for smarter investing and trading.

• Technical Analysis - What is it? (more detail) - for a more in depth understanding of what the subject entails.

• The Australian Technical Analysts Association (ATAA) is a not-for-profit organisation meeting at 9 locations around Australia.

• Fundamental Analysis - Another way to study the markets.

• Funda-technical Analysis - A clever blend of the two types of analysis.

• Technical Analysis - The proof.

• Published case studies utilising technical analysis.

• Brainy's 1-day seminar runs in Melbourne:
  "Price Chart Secrets (Technical Analysis Introdution)".

Also see Wikipedia for another view of technical analysis.

Also a range of classic text books on the subject.

Before investing money in the markets, make sure to check with a qualified financial advisor to check if your planned investment is appropriate for you.

STOP! - Are you Share Market Ready?

Whatever you do, beware of the sharks in the ocean!

Key aspects of technical analysis

Not convinced? See some supporting materials that provide evidence.

Not convinced? See some supporting materials that provide evidence.

Not convinced? See some supporting materials that provide evidence.

Price break out Some people look for a price break-out above a trading range, or outside a chart pattern (like a Triangle) especially with higher volumes which shows an underlying interest in the security. See more information about breakouts. This is explained in another aspect of Dow Theory. (Click on the image for a larger version.)

Semi-log price charts A common feature of price charts is to use a logarithmic scale on the vertical axis See more information about semi-log charts.

Volume is important

Time periods - daily weekly, etc.

Dow Theory

Chart indicators

Chart indicators Some people use chart indicators such as the Moving Average. There are many more to choose from. See more information about indicators. (Click on the image for a larger version.)

Divergence  Divergence (and bearish divergence) The chart feature where the share price is trending in one direction while a chart indicator trends in the other. (Click on the image for a larger version.)

Price Action Context

This is another aspect to the study of the price charts, and one which is not mentioned very much.

You can read more about Price Action Context here in the Toolbox.

How can we use simple technical analysis to be profitable?

Okay, so how can we use the simple aspects of technical analysis to: identify potentially profitable stocks, invest wisely, manage the risk, and protect our capital against downside risks? See the details here...

In summary

The study of technical analysis provides invaluable insights into the underlying mood and sentiment of the security or the market. It can be applied to price charts of stocks, and the market index, and commodities, and other financial instruments.

Price charts summarise the underlying opinions
and emotions of the market participants.
Every chart tells a story. Understand the stories in the price charts.

The above samples are merely a small collection of samples - there is much more to this field of study.

And if you have trouble with the charts, some people study technical analysis without using price charts at all - the branch of study referred to as numerical analysis, or computational analysis.

There are a number of basic strategies that some people consider implementing.

More information

Technical Analysis - What is it? (more details)...

Technical Analysis - Some simple and useful applications

Technical Analysis - how to get started...