What is Stock Market Technical Analysis?

Instructor: Jason Matyus
Technical analysis is a method for predicting security prices based on the volume and price of the security. While there are other ways to analyze securities, technical analysis is common.

What Is Technical Analysis?

Ice skaters will tuck their elbows in for greater centrifugal force when competing. When ice skaters tuck in their elbows, it allows them to be able to spin tighter and quicker. Athletes will eat a lot of carbohydrates to give them energy when competing. Business leaders will read up on industry trends to be more competitive and successful. All these things are done to give a competitive edge to the participants. Investors are the same way they will use any advantage they can to be able to pick the rise or fall of the next security. One of those methods is technical analysis. Technical analysis is just one example of a tool analysts uses to evaluate securities. Technical analysis combines using a securities price movement and the volume of security.

Technical Analysis Factors

The people who study and trade securities are called financial analysts, and their job is to predict for their company, an individual client, themselves, or for the market in general what securities in the market will do for the day. To better understand how an analyst picks securities, it is better first to understand the theory many investors point to when deciding market trends. The theory is called the Dow Theory derived from Charles Dow. Charles Dow explained the analyst look at every factor that could influence a securities price. Some examples of influence could be seasonal shopping, the rise in unemployment, or an election year. The second main point about the Dow Theory is that over time securities play out in a pattern and repeats the pattern. The Dow Theory develops patterns in a cyclical way that makes securities predictable to investors. The Dow Theory supports the use of technical analysis to pick securities because of using the price of the security (movement) and how much of the security (volume).

Examples of Charting

While there are no slam dunk charts that can predict with 100% certainty the outcome of securities, there are some charts that support technical analysts in picking securities. Charts are a good method to see what analysts use to visualize technical analyst. While there are many different types, only a few will be covered here. The first chart is:

Head and Shoulders

This chart is supported by a head and two shoulders. The characteristics of the chart are two peaks (in securities prices)--representing the shoulders--and an even larger peak in the center--representing the head. This chart pattern represents a weakening of the securities prices because of the varying changes in the highs and low.

H and S

Cup and Handle Charting

This chart is representative of a bullish (going up) security that shows exaggerated upward pricing over longer periods of time, such as weeks, months or even years. The handle in the chart represents a short period in downward value in the securities. After the short interval passes, the value is expected to continue back up.

C and H

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