| Technical
Analysis applied to the stock market
Technical analysis is the study of price action through the use of charts. In this way,
charts become a graphical representation of the price action over a defined period of
time. The theory is based on the premise that history repeats itself, which means that
past price patterns will repeat in the future; therefore by analysing price behaviour and
identifying certain price patterns, the technical analyst is able to anticipate price
movements.
The price of a security is defined by supply and demand; it is the price at which one
person agrees to buy and another agrees to sell. Whether the fundamentals are good or bad,
some investors will be buying while others will be selling. The reason why investors act
in such a way is because they have different expectations about the future price of a
security; the price of a stock or any security is driven by human expectations. In the
absence of news the price will move according to investors' expectations.
There are other factors to consider such as
emotions, greed and fear. For most investors it is difficult to be rational and
disciplined when it comes to making investment decisions. A stock which is moving sharply
higher will attract attention, many investors will be tempted to buy as they don't want to
be left out of the action: this is the greed factor. On the other hand a stock which is
moving sharply lower will tempt people into selling as investors are fearful. Those waves
of buying and selling, which are not triggered by fundamental news, create an imbalance
and push the price into oversold/overbought areas. As a result, those price extremes are
in general followed by sharp corrections. On a chart, this price behaviour is referred to
as a pattern. You will learn from technical analysis to identify these patterns and how to
use them effectively. History repeats itself: there is nothing new in the way investors
behave, it is just a repeat of their past behaviour.
If humans did not have any emotions then the market would
probably be efficient. The efficient market theory states that security prices represent
everything that is known about the security at a given moment. According to the theory it
is impossible to forecast prices, since prices already reflect everything that is
currently known about the security. Any news, company announcement or brokers report would
be reflected in the price immediately and because such information is random the theory
states that it is impossible for investors to consistently outperform the market in the
long term. I believe that markets are not efficient and I can show you how any disciplined
investor can outperform the market in the long term using technical analysis.
No one should ignore the fundamentals underlying a
company's share price. A company with a competitive product or service, delivering
consistent growth in profits and earning per share should be a good bet. On the other hand
a company struggling in a declining sector should be avoided. I believe that
fundamental analysis should be used in conjunction with technical analysis in order to
make better investment decisions. There are two main areas where technical analysis
will help:
1. Discipline: successful traders do not act on tips or rumours; they
are not greedy or fearful of the market; they act according to their trading methodology
and stick to it.
2. Market timing: making money from the stock market is about buying
and selling at the right time. You may be right on the direction of the market but
if your timing is wrong you won't make money. This is where I can help you.
Years of research in the stock market have led me to create some innovative tools to time
the market. These are unique tools only available from e-yield.
To understand how the market works and how to profit from chart
analysis one should have a basic understanding of technical
analysis. Success in the stock market is about identifying
opportunities at an early stage and managing money efficiently, but
also about discipline and confidence. My objective is to enable individuals
to become more successful investors.
Thierry Laduguie, MSTA |
