Fundamentals of Investments - Technical Analysis PDF

TECHNICAL ANALYSIS  WHAT IS TECHNICAL ANALYSIS? Studying stock price graphs and a few momentum oscillators. Based entirely on prices Do not include Balance Sheets, P&L Accounts (fundamental analysis) The assumption being that the markets are efficient and all possible price sensitive...

TECHNICAL ANALYSIS  WHAT IS TECHNICAL ANALYSIS? Studying stock price graphs and a few momentum oscillators. Based entirely on prices Do not include Balance Sheets, P&L Accounts (fundamental analysis) The assumption being that the markets are efficient and all possible price sensitive information is built into the price graph of a security / index. Exclusive use of historical data.  ASSUMPTIONS OF TECHNICAL ANALYSIS 1. Market discounts everything Only considers price movements, ignores fundamental factors. Assumes stock price reflects everything. All fundamentals are priced into the stock. 2. Prices moves in trends Price movements are assumed to follow particular trend. Most technical strategies are based on this assumption. 3. History trends to repeat itself Market participants provide consistent reaction to similar market stimuli over time.  DOW THEORY The Dow theory on stock price movement is a form of technical analysis. The theory was derived from 255 wall street journal editorials written by Charles h. Dow , journalist, founder and first editor of the Wall Street journal and co-founder of Dow jones and company. Hypothesis:- Dow Theory is based on the hypothesis that the stock market does not perform on a random basis. Rather, it is guided by some specific trends. Three types of specific trends have been named in Dow Theory PRIMARY TREND:- primary movement or major trend may last from less than a year to several years. It can be bullish or bearish. SECONDARY TREND:- primary movement or major trend may last from less than a year to several years. It can be bullish or bearish. MINOR TREND:- day to day trend or movements in prices over few days. It is of very short duration.  BASIC ASSUMPTIONS Market price determined by demand and supply forces. Prices move in trend for long periods. Reversal or shift in price trends may occur. Charts and graphs can predict change in demand and supply forces. Price patterns tends to repeat themselves.  CHARTING : THE BASIC TOOL Motive of identifying price trends based on historical data. Trend used to forecast future behaviour. Used for either a particular security or market in general. Both price and volume data are studied simultaneously for both (security as well as the market).