How Do You Use Technical Analysis To Research Stocks?
Another way to research the stock market, in addition to fundamental analysis, is by using technical analysis. This type of analysis consists of using charts to evaluate a stock’s strengths or weaknesses. The technical analyst must be able to make and interpret these charts. Using these charts, the analyst will try to predict the best time to buy, or sell, a stock.
Technical Analysts Study Trends:
This type of analyst believes prices move in trends. So, if the price of their stock is rising, they will tend to think it will continue rising. On the other hand, if their stock is stable, they believe it will remain stable. These investors believe that the trend of the market can be identified over the short-term and the long-term. The technical analyst’s goal is to seek profit from these trends.
Technical analysts are concerned with a stock’s price movements and volume over a period of time. The technical analyst relies on past activity to determine the “future” movement of a stock.
Technical Analysts Study Charts:
Technical analysts consider themselves “true” chartists. These analysts use charts as a tool and study chart patterns. The technical analyst believes that by studying charts they can avoid the stocks that will not recover. They wait and purchase the stocks that they believe will recover at a more advantageous time.
An investor using technical analysis does not take a “logical” approach but relies on a “psychological” approach. They carefully study other investors actions hoping that this will shed some light on what they are likely to do going forward.
Differences Between Fundamental And Technical Analysts:
Fundamental analysis takes the opposite view and places the majority of the emphasis on logic. Moreover, the fundamentalist, unlike the technical analyst, cares very little about the pattern of past price movements.
Unlike the fundamental analyst, the technical analyst also pays no attention to a company’s financial statements. Moreover, in contrast to the fundamentalist, a true technical analyst does not even concern themselves with what business, or even industry, the company is in!
Some investors use a “combination” of fundamental and technical analysis in their analysis of the markets. This is up to the individual investor. However, an investor should keep in mind that it is not absolutely necessary to use both methods of analysis.
In conclusion, technical analysis has its uses, although, most of Wall Street security analysts, today, are fundamentalists. Technical analysts perform their research by studying charts. These analysts make price forecasts by using past historical data.
Technical analysts see little significance in studying a company’s financial statements and are not even concerned with what business the company is in. As this article demonstrates, fundamental analysis and technical analysis differ greatly from one another in evaluating stocks.
Interesting article Linda. I guess I am a fundamentalist. I’ve never truly done technical analysis nor know the details of how to go about it. After I do my fundamental analysis and want to buy, I will look for dips/weakness in the chart to best time my purchase, but I’m not really sure if that is a form of technical analysis. Tom
Tom: I am also a Fundamentalist and a huge Warren Buffett fan! Technical analysis appears to be very complex for the average individual investor. I have read that it’s not a bad idea to know both strategies, however, my main focus is always on the company’s fundamentals.