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History[ edit ] The principles of technical analysis are derived from hundreds of years of financial market data.
In Asia, technical analysis is said to be a method developed by Homma Munehisa during the early 18th century which evolved into the use of candlestick techniquesand is today a technical analysis charting tool. InRobert D. Edwards and John Magee published Technical Analysis of Stock Trends which is widely considered to be one of the seminal works of the discipline.
It is exclusively concerned with trend analysis and chart patterns and remains in use to the present. Early technical analysis was almost exclusively the analysis of charts because the processing power of computers was not available for the modern degree of statistical analysis.
Charles Dow reportedly originated a form of point and figure chart analysis. Dow theory is based on the collected writings of Dow Jones co-founder and editor Charles Dow, and inspired the use and development of modern technical analysis at the end of the 19th century.
Other pioneers of analysis techniques include Ralph Nelson ElliottWilliam Delbert Gann and Richard Wyckoff who developed their respective techniques in the early 20th century. More technical tools and theories have been developed and enhanced in recent decades, with an increasing emphasis on computer-assisted techniques using specially designed computer software.
General description[ edit ] Fundamental analysts examine earnings, dividends, assets, quality, ratio, new products, research and the like. Technicians employ many methods, tools and techniques as well, one of which is the use of charts.
Using charts, technical analysts seek to identify price patterns and market trends in financial markets and attempt to exploit those patterns. These indicators are used to help assess whether an asset is trending, and if it is, the probability of its direction and of continuation.
Examples include the moving averagerelative strength indexand MACD. There are many techniques in technical analysis. Adherents of different techniques for example, Candlestick analysis -the oldest form of technical analysis developed by a Japanese grain trader- HarmonicsDow theoryand Elliott wave theory may ignore the other approaches, yet many traders combine elements from more than one technique.
Some technical analysts use subjective judgment to decide which pattern s a particular instrument reflects at a given time and what the interpretation of that pattern should be. Others employ a strictly mechanical or systematic approach to pattern identification and interpretation.
Contrasting with technical analysis is fundamental analysisthe study of economic factors that influence the way investors price financial markets. Technical analysis holds that prices already reflect all the underlying fundamental factors.
Uncovering the trends is what technical indicators are designed to do, although neither technical nor fundamental indicators are perfect.
Some traders use technical or fundamental analysis exclusively, while others use both types to make trading decisions. Technical analysis stands in contrast to the fundamental analysis approach to security and stock analysis.
Multiple encompasses the psychology generally abounding, i. Also in M is the ability to pay as, for instance, a spent-out bull can't make the market go higher and a well-heeled bear won't.
Technical analysis analyzes price, volume, psychology, money flow and other market information, whereas fundamental analysis looks at the facts of the company, market, currency or commodity. Most large brokerage, trading group, or financial institutions will typically have both a technical analysis and fundamental analysis team.
In the s and s it was widely dismissed by academics. In a recent review, Irwin and Park  reported that 56 of 95 modern studies found that it produces positive results but noted that many of the positive results were rendered dubious by issues such as data snoopingso that the evidence in support of technical analysis was inconclusive; it is still considered by many academics to be pseudoscience.
A core principle of technical analysis is that a market's price reflects all relevant information impacting that market. A technical analyst therefore looks at the history of a security or commodity's trading pattern rather than external drivers such as economic, fundamental and news events.
It is believed that price action tends to repeat itself due to the collective, patterned behavior of investors. Hence technical analysis focuses on identifiable price trends and conditions.
Prices move in trends[ edit ] See also: Market trend Technical analysts believe that prices trend directionally, i. The basic definition of a price trend was originally put forward by Dow theory.
A technical analyst or trend follower recognizing this trend would look for opportunities to sell this security. AOL consistently moves downward in price. Each time the stock rose, sellers would enter the market and sell the stock; hence the "zig-zag" movement in the price.
The series of "lower highs" and "lower lows" is a tell tale sign of a stock in a down trend. Each time the stock moved higher, it could not reach the level of its previous relative high price. Note that the sequence of lower lows and lower highs did not begin until August.
Then AOL makes a low price that does not pierce the relative low set earlier in the month. Later in the same month, the stock makes a relative high equal to the most recent relative high.Featured News Analysis Group Recognized as a Leading Global Economic Consultancy by Global Competition Review.
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