Archive for July 22nd, 2008

ANALYSIS OF SHARES. Continuation. The technical analysis

Posted on July 22nd, 2008 by admin, under Uncategorized.

ANALYSIS OF SHARES. Continuation. The technical analysis

The technical analysis is the kind of the analysis that entirely bases on the examination graphs of prices and volume of the tenders of the given share. In this sense it is not, strictly speaking, consistent with fundamental analysis. Experienced traders and investors know how to use both types of analysis correctly.

Historically technical analysis proceeds from the “Dow Theory”: The main characteristic of market of shares is trend of set of shares (stock indexes come from here and the oldest of them – Dow Jones). Naturally the definition of points of trend’s “breakthrough” (i.e. turn) have special importance.

Dow has suggested to define trend by index of leading shares (industrial Dow) and a turn to determine the validity of a turn use the confirmation signal from the “transport Dow” (index of the transport companies).

Today, the major indexes for the American market are not only the Dow, but also S&P 500, NASDAQ 100, but the Dow technique can be applied now also.

Also the major indicator, especially in dramatic moments of turn of trends is the volume of trading. At the end of rapid growth almost always the last movement upward happens (in the day time scale) on sharp falling volume, and strong first falling - at great volume. Such picture took  place in a deep correction on the Russian stock market on May 10, 2006, for example.

So, the technical analysis. Major POSTULATES:

  • Price takes into account EVERYTHING;
  • Prices are moving directed;
  • History repeats itself.

It is classical, “educational variant”. I’d like to offer some of my own amendments – clarifications:

  • Price takes into account everything. However this happens not immediately but gradually! And the more global acting factor is, the longer is the “response time” of price.

The theory of efficient market implies INSTANT action of the new information to the price:

  • Prices are moving directed. SOMETIMES! But not all the time.
  • History repeats itself. This fact is the most nebulae, I will not comment it. Usually in training “figures” of technical analysis are demonstrated – double peaks, “head-shoulders”, etc. But you can always find cases where the figure “does not work”.

Nevertheless the technical analysis is the major tool of the analysis as it helps to understand the state of the market (in what condition is our share?).

Let’s try to supplement postulates of technical analysis:

  • The prices graph contains simultaneously casual and non casual component;
  • The ratio of “casual-non casual” components defines efficiency of the market: the higher is the share of casual components, the more effectively market is, and the more difficult is earning on it.
  • Task of trader (and investor) is to allocate non casual component and use it for profit.
  • We can identify two states of an active (or the market): trend movement and consolidation. Two of these are moving from one state to another, cyclically, but through different time-intervals.

It is fundamentally important for the trader (investor) to learn to identify are we in trend motion or in zone of consolidation. There is the best trade tactic for each of these states, but when applying the tactic at the wrong market, we risk to get losses instead of profits.

 

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