Technical analysis

Technical analysis is as the name suggests the observation of stocks using chart data in order to predict ups or downs of any given stock. Those who practice this are generally not concerned about the overall value of a company. They normally engage in short term trading with the idea of making a quick profit.

The idea behind any chart data is the recognition of pattern movements. The goal is to spot these patters and make money on them when you can. As a result of efficient data collection by the stock market on events such as natural disasters, terrorist attaches, and company performance the theory is that you will be able to make good calls on any given stock.

The thing to note with this type of investing is that this is not for longer term. The goal of such investors is to watch stock patterns. The fundamentals of company growth are not taken into consideration. Therefore long term performance of a given company is not the key component. The fundamental of technical analysis is the execution of profitable investments over the short term.

Investors using this data can take advantage of stocks that are either rising or falling. They can then implement a stop loss order to reduce losses on either end. This like any other technique with an objective in mind sets out to achieve a given result through the use of data collection over time and then predict outcomes based on that same data. These investors rely on charts and analysis of such charts to make profitable trades. That is the essence of technical analysis.

 

In the world of trading and investing, there are literally hundreds of technical indicators that have been developed over the years by a variety of people, fascinated by the markets. All the indicators have three things in common. Firstly they were developed as a silver bullet to tell you exactly when to open or close a position, secondly, they are all based on lagging information, and thirdly they all work some of the time!

The only indicator that I use in my daily trading is the simple moving average or SMA. They are the most basic and simple indicator of all, and whilst they are a fairly blunt tool in our tool kit, they do offer a very basic overview of what is happening on the chart, and provide simple guidance as to the possible future direction of prices.

As the name suggest a simple moving average is simply that - so a 20 day SMA is the last 20 days prices added together and divided by 20 to arrive at an average. I did say it was simple. That is all there is to it! - I only use 2 to keep the screen uncluttered and these are a 50 day and a 200 day. When you listen to commentary on the markets on the financial news stations, or on TV you will hear them refer to these figures - i.e.: ‘a commodities price has crossed below its 200 day moving average’ - so even the professionals use them! The reason that I only use two is that they give me a slightly different view of prices over different timescales, and the screen remains clutter free.