Technical Analysis for Stock Investing: A Comprehensive Guide

Often stock investing advice is based on technical analysis. This form of market analysis is a different approach from fundamental analysis, which is the common type of market analysis.

The Technical Approach

The technical approach to stock investing advice is taken by “chartists” or technicians, who make stock selections looking at detailed charts that are created by analyzing the activity of the market in the past, including stock prices and the volume traded.

They use this information of past prices and stock movement, as well as other indicators, to make an educated guess about where the cost of stock will go in the future.

Outside Events

The underlying philosophy for a technician or technical analyst is that all every individual factor that does affect stock prices or the market for stocks will very quickly be apparent in the price of stocks.

These effects can be up or down, but the effects of the external events will, in fact, affect the price of stocks almost immediately.

Some external factors that can affect stock price are political events, natural disasters, and many psychological factors.

Factoring in External Events

The technicians believe that markets are efficient, and therefore have absorbed them in to the price of their stock. They are certain that prices move according to trends, and  they believe that history will repeat itself.

Unlike other strategies, technical analysis is stock investing advice that is not based on the overall or underlying value of a particular company. Many technicians make money investing in companies about which they know very little.

They are not concerned with the company’s management team or leadership, they could care less about the business model of a firm or the competition they are challenging. All they consider is trends as shown by past stock performance.

Short Term Strategy

As some find to their chagrin, technical analysis is most effective as a short term, not for a long-term buy and hold strategy. The technician is probably a very active trader, watching constantly for price fluctuations and trying to capitalize on them.

Analysts will go either long or short on stock, depending on whether their data says the price is likely to go up or if it is likely to go down.

If the strategy is ineffective in a certain instance, there is not a lot of hand wringing or discussion on the part of a technician. They will set a stop loss point in order to be certain that their losses are limited because of a stop loss order.

As opposed to a fundamental analyst, who may need a high degree of patients while it waits for market corrections, the technical analyst getting stock investing advice from past trends must be agile in the market and understand how a person can enter or leave the position in the market speedily.

Support and Resistance

Support and resistance are two important concepts in technical investing. Support means the level where the technician expects that a stock will generally start to increase afte a decline, while resistance is decreasing after an increase.