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What's The Connection? Stocks And Technical Analysis

by: JesseProfit
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In making determinations as to what the stock markets worldwide are going to do in terms of how prices move, there are two distinct schools of thought about analysis of companies and their investment prospects. The typical school of thought, and one that has been successful over the last decades has been the school of fundamental analysis.

This type of analysis looks at the financial prospects of a company, and then looks at their chances of achieving desirable results compared to its competition. On the other side of the fence, there are some in the school of thought involving technical analysis, a largely unscientific but seemingly successful school of thought as well. So, what exactly is the connection between technical analysis and stocks?

If you can believe it, technical analysis is simply the studying of past market trends to make a determination as to what the future of the stock's price is going to be. But, that still doesn't answer the whole question - what is the whole connection between technical analysis and stocks? More importantly, how can people think they can predict the price of a stock from looking at charts and graphs and not the financial health or condition of a company?

Well, part of the reason that technical analysis is utilized by some market analysts is that, although one would think that statistically speaking a trading day on the stock market should only be influenced by that day's events and treated like an independent event, the reality is that most market movement trends over time and the full impact of one event (a downgrade of the stock by an analyst or a movement of earnings higher than expected by the same analysts) is never isolated to one day.

Therefore, technical analysis makes use of a lot of diverse data, including trading volume charts, old stock quotes, and much more. This data is then in turn used to look at particular issues which help in developing graphs and charts. These then help in determining the length of the impact of a move in a company will endure and also the outcome that it has on stock market trading.

Comparing technical analysis and fundamental analysis of the same stock market shows that in the short term technical analysis is a short term predictor. Just as the technical analyst reputation has become, of being a short term predictor. Conversely, fundamental analysis is a long term tool that helps predict long term trends in markets.

Due to complexity of the language and terminology used technical analysis can be quite off putting to laypeople who may not understand this verbiage. Since graphs and trend lines involve this terminology and it can sometimes be ambiguous. Many different terms can be used to denote the same trend on a graph and this can cause confusion of the typical investor who may want to invest. For example, a shoulder or an elbow can denote the same thing in a trend on a graph. Talking about leveling and drops in regard to market fluctuations can be quite intimidating to a general investor.

In conclusion, the question still remains, \"What's the connection between technical analysis and stocks?\", how is it determined and on what basis? How can these tools be used daily and made easier to comprehend. Although, technical analysis is not as accurate and can be very subjective, it has been successful so it makes it hard to dispute that it is still a viable tool used in market analysis.

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What's The Connection? Stocks And Technical Analysis

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