Technical Analysis

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

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.

Don't believe it?

Somewhat sceptical about the idea that there are stories in the price charts that are left behind by the market participants? See the chart at right and consider the following observations (click on 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.] 

CBA - the stories in the price charts
Weekly price chart of CBA 
from October 2013 to May 2014.

The opinion of market participants
is captured in the price charts.

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), all of which 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.
The 4 Windows approach

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.

Many people who use technical analysis will look for a rising trend, and invest in the direction of the trend - "the trend is your friend".

See more information about trends.

And this is related to one aspect of Dow Theory.

(Click on the image for a larger version.)
A simple uptrend.

The ideas of support and resistance on a price chart
have a lot of signifance, and
are clearly explained by the
underlying mood and opinions of
the investors and traders.

See more information about support / resistance.

(Click on the image for a larger version.)
Support and Resistance

Some people look for chart patterns,
such as an Ascending Triangle.

(Click on the image for a larger version.)
Ascending Triangle

Some people use chart indicators like a Moving Average.
There are many more to choose from.

(Click on the image for a larger version.)
Moving Average on a price chart

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.)
A sample break-out

The Head and Shoulders chart pattern has
strong underlying significance,
especially when volume is considered.

(Click on the image for a larger version.)
Head and Shoulders chart pattern

The size, shape and key features of
individual candlesticks on a candlestick chart 
can also tell us a lot.
The Bullish Kicker candle at right is a
good warning of a possible positive
change in market sentiment.
Bullish Kicker candle pattern

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.)
Bearish divergence on the index

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.
Semi-log price charts

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 - how to get started...

Also see the links in the column at right above.

View the proof

See some academic and research papers that provide evidence to support the notions of Technical Analysis.

Practical applications
and case studies

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

More details

For more information on this topic, see:

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!

Beware the sharks in the ocean.

The information presented herein represents the opinions of the web page content owner, and
are not recommendations or endorsements of any product, method, strategy, etc.
For financial advice, a professional and licensed financial advisor should be engaged.

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Last revised: 20 September, 2014.