1 0
post icon

Technical analysis of stock trends

If you have ever indulged in any form of stock trading, you would definitely have taken a look at a price chart at some point in time to study price movements. For many investors and analysts, a stock price chart is the starting point for carrying out an analysis and even people who do not believe in technical analysis use charts from time to time. Charts can provide a lot of information in a very short space of time.

For instance, if you are looking at long-term investment, you can take a quick look at a price chart of say five years and determine at a single glance how investors have been rewarded. If you see a lot of upward and downward price movements, obviously the stock is much more volatile than a stock where the movement is relatively even. However, if you know how to read a chart properly, that is a lot more information you can gather and then these simple self-evident facts.

It is important to remember that charts can generate two types of trading information that can be used to forecast future price movements. A continuation pattern suggests that the trend being studied will continue while a reversal pattern suggests that the direction of the trend is about to reverse. Charging does not pretend to be an exact science [except to its most ardent proponents] and the use of patterns and their identification can be a difficult process which involves subjective judgment.

A fundamental principle of technical analysis is that a market’s price reflects all relevant information, so their analysis looks at the history of a security’s trading pattern rather than external drivers such as economic, fundamental and news events. Price action also tends to repeat itself because investors collectively tend toward patterned behavior – hence technicians’ focus on identifiable trends and conditions

While fundamental analysts examine earnings, dividends, new products, research and the like, technical analysts examine what investors fear or think about those developments and whether or not investors have the wherewithal to back up their opinions; these two concepts are called psych (psychology) and supply/demand. Technicians employ many techniques, 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. Technicians use various methods and tools, the study of price charts is but one. Technicians using charts search for archetypal price chart patterns, such as the well-known head and shoulders or double top/bottom reversal patterns, study technical indicators, moving averages, and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants, balance days and cup and handle patterns. Technical analysts also widely use market indicators of many sorts, some of which are mathematical transformations of price, often including up and down volume, advance/decline data and other inputs. These indicators are used to help assess whether an asset is trending, and if it is, the probability of its direction and of continuation. Technicians also look for relationships between price/volume indices and market indicators. Examples include the relative strength index, and MACD. Other avenues of study include correlations between changes in options (implied volatility) and put/call ratios with price. Also important are sentiment indicators such as Put/Call ratios, bull/bear ratios, short interest, Implied Volatility, etc.
There are many techniques in technical analysis. Adherents of different techniques (for example, candlestick charting, Dow Theory, and 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.
Technical analysis is frequently contrasted with fundamental analysis, the study of economic factors that influence the way investors price financial markets. Technical analysis holds that prices already reflect all such trends before investors are aware of them. Uncovering those trends is what technical indicators are designed to do, imperfect as they may be. Fundamental indicators are subject to the same limitations, naturally. Some traders use technical or fundamental analysis exclusively, while others use both types to make trading decisions.

Characteristics of technical analysis

Technical analysis employs models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, business cycles, stock market cycles or, classically, through recognition of chart patterns.
Technical analysis stands in contrast to the fundamental analysis approach to security and stock analysis. Technical analysis analyzes price, volume 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.
Technical analysis is widely used among traders and financial professionals and is very often used by active day traders, market makers and pit traders. In the 1960s and 1970s 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 snooping, so that the evidence in support of technical analysis was inconclusive; it is still considered by many academics to be pseudoscience. Academics such as Eugene Fama say the evidence for technical analysis is sparse and is inconsistent with the weak form of the efficient-market hypothesis. Users hold that even if technical analysis cannot predict the future, it helps to identify trading opportunities.
In the foreign exchange markets, its use may be more widespread than fundamental analysis. This does not mean technical analysis is more applicable to foreign markets, but that technical analysis is more recognized as to its efficacy there than elsewhere. While some isolated studies have indicated that technical trading rules might lead to consistent returns in the period prior to 1987, most academic work has focused on the nature of the anomalous position of the foreign exchange market. It is speculated that this anomaly is due to central bank intervention, which obviously technical analysis is not designed to predict. Recent research suggests that combining various trading signals into a Combined Signal Approach may be able to increase profitability and reduce dependence on any single rule.

Go to the article »
02. Feb, 2012
post icon

How to buy stocks without a broker?

Managing your own brokerage account, thereby bypassing the need for a stock broker, has become an increasingly popular option for many traders around the world.

Dealing with stocks these days doesn’t require you to have your own broker since you trade on your own with the help of the Internet. All that you need to do is to set up your own account online and get to start trading soon. This is the answer that investment firms gave their customers who wish to either sell or buy stocks on their own. So what are the steps needed to buy stocks without a broker? Listed below are the basic steps that you can follow to be able to deal with trading stocks online.

First, you can invest in the company through its direct stock purchase plan. Many popular companies like Walt Disney offer such a plan to interested individuals who want a share of the magic without spiraling into bankruptcy. You will find that investments in direct stock purchase plans can make thousands of profits on just a few hundred of dollars in capital investment, if and when you know how to choose good stock picks.

The terms and conditions of the plan will vary but most are affordable. For example, the company will require a certain amount of deposit for one share. Your subsequent acquisition of other shares will be through automatic debiting of your account on a monthly basis. You are basically saving money albeit in the form of stocks in a profitable company, not currency in the bank.

Online Trading Companies

Using an online brokerage firm may, technically speaking, still count as a “broker”, but only because unless you buy shares directly from the corporation itself, you simply cannot buy them independently. Online firms such as these provide a buying and selling platform that is non-invasive and usually offer a flat commission per trade.

Research the stocks you want to invest in. Most of these online trading sites also provide research material so you can educate yourself on the stocks and bonds you may be interested in buying. You should do a lot of research on any stock before you decide to invest your money in the stock. These sites also help you to understand finance and trading terminology that you may be familiar with. It is important that you make informed and educated decisions to help reduce the risk of loss of your money.

Invest through the company’s direct stock purchase plan

A number of companies, offer direct stock purchase plans. These plans allow investors to buy shares of stock directly from the company. Most have a minimum initial deposit but are happy to waive it if you agree to automatic monthly withdrawals from your checking or savings account. This way, the company automatically purchases stock for you by debiting your bank account every month. This can be an easy and relatively painless way to save.

Take advantage of the DRIP program’s cash investment option

Many companies also offer something called Dividend Reinvestment Plan or DRIP, in which all dividends are reinvested in additional shares rather than being deposited into your bank account. If you want to buy stocks without a stock broker, enrolling on a DRIP program may be the easiest and quickest, as it can often be done online in a couple of minutes, even by inexperienced investors. Some companies require you to own a share in the company before you can enroll in their DRIP plan. This can be done easily if the company you are interested in is a big one, as most corporations have shares available for sale to the public.

Go to the article »
30. Jan, 2012