Step 4: Technical analysis

What you’ll learn in this step: Technical analysis is a numbers game.

Technical analysts look for patterns in share prices, applying a myriad of mathematical models and charting methods to information such as opening and closing prices, share price highs and lows, and trading volume.

This form of analysis employs a myriad of tools and techniques, but they all flow from the premise that price patterns and trends exist in markets and they can be identified and exploited.

Technical analysts use tools such as bar charts, candlestick charts and trend lines as well as technical indicators ranging from simple moving averages to the more complex stochastic oscillators.

Let's look at moving averages by way of example. A moving average is simply the average closing price over a specified period to the current day. Moving averages can be used to define trends by contrasting the direction of change in a moving average's value relative to the previous day.

For example, if today's close is higher than the moving average, this should indicate an upward trend. The benchmark S&P/ASX 200 Index could be compared to the 20-, 50- or 100-day moving average, for example.

Debate continues about which method of analysis – fundamental or technical – is better, but they are not necessarily mutually exclusive.

Fundamental analysis could help an investor pinpoint stocks of interest, while technical analysis might point to a good time to buy.

Technical analysis tools include:

  • Bar charts
  • Candlestick charts
  • Trend lines
  • Moving averages
  • Momentum indicators
  • Relative strength index

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