Strengths of Technical Analysis
Focus on Price
It makes logical to concentrate on price swings if the goal is to forecast future prices. Fundamental developments are typically preceded by price mswings .Technicians are automatically looking to the future when they concentrate on price action. The market typically outpaces the economy by six to nine months, making it a leading indicator. To stay ahead of the market, it makes sense to pay close attention to price movements. Usually, change is a kind of subtle beast. Hints often appear before big changes, despite the market’s propensity for unexpected, impulsive reactions. times of accumulation indicate an imminent advance, whereas times of dispersal indicate an imminent collapse, according to a technician.
Supply, Demand, and Price Action
When examining a security’s price activity, many technicians use the open, high, low, and close.Every bit of knowledge can be used to learn something. These won’t be able to reveal anything on their own But when combined, the open, high, low, and close represent supply and demand pressures.
Boeing Co. (BA) Technical Analysis example chart from StockCharts.com
The annotated example above shows a stock that opened with a gap up. Before the open, the number of buy orders exceeded the number of sell orders and the price was raised to attract more sellers. Demand was brisk from the start. The intraday high reflects the strength of demand (buyers). The intraday low reflects the availability of supply (sellers). The close represents the final price the buyers and sellers agreed upon. In this case, the close is well below the high and much closer to the low. This tells us that even though demand (buyers) was strong during the day, supply (sellers) ultimately prevailed, forcing the price back down. Even after this selling pressure, the close remained above the open. Looking at price action over an extended period, you can see the battle between supply and demand unfold. In its most basic form, higher prices reflect increased demand, and lower prices reflect increased supply.
Support/Resistance
The use of simple chart analysis can help determine levels of support and resistance.These are usually characterized by trading range congestion, when prices remain stuck between supply and demand for an extended period of time inside a narrow range.Price changes that deviate from the trading range suggest that either supply or demand is starting to increase. If prices increase over the upper band of the trading range, demand is winning. If prices are below the lower range, supply is under control.
Pictorial Price History
A price chart can provide a wealth of useful information, even for seasoned fundamental analysts.An easily readable historical account of a security’s price movement over time is provided by the price chart.A table of numbers is far more difficult to understand than a chart.Volume bars are shown at the bottom of the majority of stock charts. This historical image makes it simple to recognize the following:
- Reactions prior to and after important events.
- Past and present volatility.
- Historical volume or trading levels.
- Relative strength of a stock versus the overall market.
Assist with Entry Point
Technical analysis can help with timing a proper entry point. Some analysts use fundamental analysis to decide what to buy and technical analysis to decide when to buy. It is no secret that timing can play an important role in performance. Technical analysis can help spot demand (support) and supply (resistance) levels as well as breakouts. Simply waiting for a breakout above resistance or buying near support levels can improve returns.
It is also important to know a stock’s price history. If a stock you thought was great for the last 2 years has traded flat for those two years, it would appear that Wall Street has a different opinion. If a stock has already advanced significantly, it may be prudent to wait for a pullback. Or, if the stock is trending lower, it might pay to wait for buying interest and a trend reversal.
