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.
The school of fundamental analysis looks at the companies financial prospects, whether the desired results are achieved, and how it stacks up to the competition. Alternately, technical analysis has been used due to its success even though it is primarily unscientific. Well, what’s the connection regarding both stocks and technical analysis?
Technical analysis is the study of past market trends to help forecast what future stock prices will be. However, this doesn’t explain the entire connection between technical analysis and stocks. Needless to say, what makes people conclude that the price of a stock is determined by looking at just data and not take into consideration of the overall condition or financial state of a company?
The primary reason that technical analysis is used by some market analysts is because it can be used subjectively. The analysts can downgrade a stock and or anticipate higher earnings. One would think that from a statistical standpoint, a regular trading day would only be swayed by the daily activities and independent of anything else that has previously occurred. The truth is that over time market movements occur and trends develop. The movements made and the events that occur are not really isolated at all to one day, but are usually cumulative over a period of time.
The utilization of much data is primarily what technical analysis consists of. The monitoring of trading volume charts, older stock quotes, including much more data helps in the development of graphs and charts to help determine how long a particular move in a company can continue and also the specifics of stock market trading.
In many cases, a side by side comparison of a fundamental analysis and a technical analysis of the same stock market issue have yielded results in which the technical analysis has been more able to predict the short term ebbs and flows of a particular company. However, the fundamental analysis works on a longer term basis, and so the technical analyst has earned a reputation of being a \”short\” predictor rather than a \”long\” predictor in the 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.
Overall, those who are familiar with investing still question, \”Technical Analysis vs Stocks…Is there a connection?\” in regard to how can these types of analysis can be used everyday. Honestly, the fact that technical analysis is very subjective to the person who uses it, including being a bit imprecise brings concern. Fortunately, since it has been successful on the whole, this tool is still arguably a good one to use for market analysis.