Technical Stock Analysis
Technical stock analysis works, but not with the standard indicators or methods like Fibonacci, GANN Charts or Cycles.
The objective of technical analysis is to participate as long as possible in a trend or to swing and detect trend reversals at an early stage to secure achieved gains and reduce loss to the highest possible degree.
Technical analysis works with a variety of indicators
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The great breakthrough of technical analysis came with the development of more efficient computer systems during the last 20 years - until then real time calculations were not possible. Before you had to either manually calculate the figures and draw the charts by hand or buy expensive chart booklets.
Technical analysis is to determine the optimal buy and sell time. Technical analysis works with a variety of indicators to calculate and detect existing and future, short and medium term trends. The bases for all calculations are historical
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stock data, trading volume, statistical and mathematical evaluations and chart statistics. The indicators that technical analysis is based upon can be divided into four groups: trend indicators, trend following indicators, oscillators and volatility indicators.
The objective of technical analysis is to participate as long as possible in a trend or to swing and detect trend reversals at an early stage to secure achieved gains and reduce loss to the highest possible degree.
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1. Trend Indicators
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All future calculations require that one first establishes whether any trend (up or down) exists at all or whether the stock concerned is in a phase of range trading.
The oldies among trend indicators are DMI (Directional
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Movement Index concept) and ADS Indicator (and strategies). Among the newcomers are the RAVI indicators and the Random Walk Index, whereas the AROON Indicator can be seen as the next generation of trend indicators.
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2. Trend Following Indicators
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A trend follower displays the existing trend of a stock, but trend following indicators normally have a smoothing component so that they do not react to every fluctuation. Well established oldies are Moving Average, MACD or TRIX. Newcomers among the trend following indicators are VIDYA, Commodity
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channel Index (CCI) and Point of Balance-Indicator. The latest developments of this group of indicators are Kaufmanns Adaptive Moving Averages, Relative Momentum Index (RMI) and Polarized Fractal Efficiency.
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3. Momentum Oscillator
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Generally speaking, momentum oscillators measure the rate of change of a security's price, thus measuring the intensity of a trend, based on the knowledge that normally a trend weakens before it reverses. Almost all oscillators are calculated within a certain range oscillating around an axis. If the indicator reaches an extreme level (either high or low) this shows an overheated market situation (as the price of a security rises, price momentum increases. The faster the security rises, the larger the increase in momentum). But momentum will slow as the speed of the rise or fall slows down. Thus momentum
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oscillators are ahead of actual trends, indicating overheated market situations that are likely to result in trend reversals.
The oldies among the Momentum Oscillators are the RSI, Stochastic and Momentum. Among the newcomers are the TD-Rei- Oscillator, the Chaikins-Oscillator and the Chande Momentum Oscillator (CMO). The Projection Oscillator and the DSS (Double Smoothed Stochastic) can be seen as the next generation of momentum oscillators.
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4. Volatility Indicator
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Volatility is the fluctuation of a market, meaning the rate at which stocks prices move up and down. Based on historical data it is possible to calculate a standard deviation, meaning how much a certain market or stock is likely to fluctuate.
Standard Deviation Indicator and 6 / 100 Historical
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Volatility indicator are the oldies among the volatility indicators, whereas Vertical Horizontal Filter (VHF) and Chaikins Volatility Indicator can be seen as the newcomers. The Dynamic Momentum Index is the next generation in volatility indicators.
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Technical Analysis versus Fundamental Analysis
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Fundamental analysis is analyzing the goods themselves, meaning the companies for which stocks be bought. Fundamental analysts take into account the background of the company and the political situation, then calculate the actual value of an investment and interpret this data for investment based on their personal experience at the stock market.
In the long run, every capital investment will meet the actual value of the investment. Thus, if you want a long term investment, e.g., to provide security in 20 years time from now, fundamental analysis is definitely the road to take.
On the other hand it is a proven fact of stock trading that in the short run, there are often substantial differences in both
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directions (high or low) between the actual value and the market value of a stock. Sometimes the Hedger takes huge profit out of companies which are massively under valued on the stock market and slice them into pieces.
If a stock is successful in terms of fundamental analysis it will also be recognized by technical analysis. The IC Expert acts in the short term, in a range of days and weeks, to profit from these cycles in stock trading and thus technical analysis is the preferred method to achieve high profits.
The key assumption by technical analysts is that within the price of a stock all expectations of all market participants are summarized.
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Is Technical Analysis Perfect?
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The simple answer is “no”. Otherwise many people would already be very rich. But it is a good tool for guidance. When you buy a tool like Tradestation you will get already a set of 500+ indicators build in and you can buy many more.
One of the drawbacks of technical analysis is that you can get different recommendation for a single stock at the same time. This means you will have to stick to a subset of indicators or
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use another strategy like take the majority direction. But you are still left alone to know which way to go. In the following snapshot, of a random day for MSFT (Microsoft Corp) stock, you can see an illustrated example of how indicators show both buy and sell recommendations at the same time. The IC Expert on the other hand looks at all these indicators for you and then provides comprehensive technical analysis.
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You see in this chart for various technical indicators and the direction: “up” or “down”
The indicators are:
Moving average, moving average crossover and various other
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moving averages; 52 week high, 14 day RSI, 13 week low, some retracement levels; stochastic indicators, MACD, pivot points.....
What you also see is that the same indicator used with different values can produce opposite result.
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