What is Technical Analysis?

Technical Analysis involves forecasting the future of stock price movements based on an examination of past price and volume movements.

It is a bit like weather forecasting, the result is not an absolute prediction about the future.

What technical analysis really does, is help investors anticipate what is "likely" to happen to stock prices over time.

Remember - short-term traders or swing traders tend to use this analysis to make stock buying decisions.

Investors who use this type of stock analysis use indicators.

These indicators typically revolve around price and volume.

The indicators help determine whether the stock is trending (up or down) and the direction the price is headed.

The theory behind this (and what these type of investors believe)is that price moves in trends.

Often when you hear investors who rely on this type of analysis discuss a stock they will mention things like - relative strength index of the stock (RSI)and moving average convergence divergence (MACD).

They may also mention other indicators but you will definitely hear the above two mentioned.

What are they? how do they operate? Follow the link provided and learn more.

Like everything else in life most of the investors that use technical analysis have different schools of thought. The three main ones you may see or hear are:

Candlestick Charting

Elliot Theory

Dow Theory

While most investors using this analysis may rely on a combination of these three and perhaps others, almost all of them love charts.

General Approach used: Technical Analysis

As with anything successful, there is a method to the madness that is used by the investors who favor this type of analysis.

This method is based on a macro analysis approach that leads to a focused micro approach that allows them to narrow down their selections and then drill into the technicals.

Such an analysis might involve the following approach:

1. The investor would conduct a broad analysis through the major indices like the S&P 500, Dow Industrials, NASDAQ and NYSE composite.

This analysis provides an idea as to the general health and trend of the market.

2. They would also conduct a sector analysis. This helps identify the strongest and weakest groups within the broader market, of course focusing on the stronger groups.

3. Using a stock screeners to identify individual stock, the investor would perform in-depth analysis that would include indicators and perusing over charts and determining which stocks are worth trading.

The beauty of this type of analysis lies in the fact that you the investor does not need an economics degree or CPA background to look and analyze a chart.

Why? Because stock trading principles are versatile - that's why.

You need a plan, patience, and a keen eye, and understanding of the indicators, coupled with money management and you will make money in the stock market.

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