TECHNICAL ANALYSIS

• Technical analysis is the art of examining charts of past price movements to forecast future movements. Technicians those who follow technical analysis do not look at income statements, balance sheets, or other fundamental information about the company.

• Technicians' stated belief is that the current market price is the reflection of all the information available, whether or not it's known by all market participants. Since the information is already reflected in the current price of the security, technicians are of the opinion the price represents fair value and should be the basis for analysis.

• Technicians agree that prices tend to trend. According to technicians, prices also go through periods of consolidation, trading in a relatively narrow band before an uptrend or downtrend is established. Technicians are of the opinion it is possible to spot a trend, and either invest in or trade strong trends. Trend strength is determined by trading volume.

• Technicians do not place any emphasis on the company they are trading. Often, they only know the ticker symbol of the security. Their interest lies in interpreting charts to determine whether it would be profitable to trade a specific stock.

• Technical analysis can be applied to either bull or bear markets. It can also be applied across markets to stocks, market indexes, or commodities. By looking at price action over an extended period of time, you can see the battle between supply and demand unfold. Generally speaking, higher prices reflect increased demand and lower prices reflect increased supply.

• Technicians use the open, high, low, and close of a security to forecast its next move. There are periods when a security will trade within what is referred to as a trading range. During a trading range, prices move within a confined area. For example, a stock could be trading between $48 and $50 for a while without clear direction. When prices finally move out of the trading range, it's because either supply or demand has taken hold. Again, supply and demand form the basis of stock price movements. If prices move above the upper portion of the trading range, it means demand is winning. Conversely, if prices move lower than the trading range, supply is winning.

• Technicians focus on price. The price is the market's analysis of the knowledge of all participants, and is the result of the forces of supply and demand. It reflects the price that all participants agree the security is worth at any given time. As they analyze price, technicians ask several questions: What is the price? Where has the price been? Where is the price headed?

DRAWBACKS

• Technical analysis is open to interpretation. Two technicians can look at the same chart and interpret it in two different ways, even when they are both using standard analysis techniques.

• Technical indicators are often criticized for generating buy and sell signals too late, which is known as lagging.