Trying to figure out what any stock, at any given time in the world will do, as far as price movement up or down can be daunting. Well, to help with this quandary there are two different methodologies used. However, the one that has proven most reliable over many decades has been that of fundamental analysis.
This type of analysis looks at the financial prospects of a company, and then looks at their chances of achieving desirable results compared to its competition. On the other side of the fence, there are some in the school of thought involving technical analysis, a largely unscientific but seemingly successful school of thought as well. So, what exactly is the connection between technical analysis and stocks?
Simply put, technical analysis studies past trends in the market. These trends are then used to help figure out what a future of a stock's price may be. However, this entire question with regard to the connection between stocks and technical analysis is still unanswered. What allows people to think that the price of stocks can be predicted by just looking at graphs and chart? Doesn't the companies overall condition and its financial outlook help in determining or predicting stock prices?
The primary reason that technical analysis is used by some market analysts is because it can be used subjectively. The analysts can downgrade a stock and or anticipate higher earnings. One would think that from a statistical standpoint, a regular trading day would only be swayed by the daily activities and independent of anything else that has previously occurred. The truth is that over time market movements occur and trends develop. The movements made and the events that occur are not really isolated at all to one day, but are usually cumulative over a period of time.
As a result, technical analysis utilizes tons of data including old stock quotes, trading volume charts, and a host of other data, to develop charts and graphs that work to determine exactly how long the impact of a move in a company will persist and impact the stock market trading of a particular issue.
In many cases, a side by side comparison of a fundamental analysis and a technical analysis of the same stock market issue have yielded results in which the technical analysis has been more able to predict the short term ebbs and flows of a particular company. However, the fundamental analysis works on a longer term basis, and so the technical analyst has earned a reputation of being a \"short\" predictor rather than a \"long\" predictor in the markets.
Overall, technical analysis is more detailed due to the large amount of terminology used which describes existing trend lines and graphical shapes. Typical investors without the knowledge needed can be easily discouraged when trying to comprehend this type of data. For example many terms used to describe trends are ambiguous and used interchangeably (e.g. elbow, shoulder). This can denote upswings or downswings with leveling off at intervals. This can make it harder for interpretation.
Overall, those who are familiar with investing still question, \"Technical Analysis vs Stocks...Is there a connection?\" in regard to how can these types of analysis can be used everyday. Honestly, the fact that technical analysis is very subjective to the person who uses it, including being a bit imprecise brings concern. Fortunately, since it has been successful on the whole, this tool is still arguably a good one to use for market analysis.
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