Technical Analysis and the Assumptions it Works by Kotak Securities
Technical analysis is one of the most basic methodologies used to analyze securities on the basis of its previous statistics generated. On the basis of varied types of charts, graphs and other tools; the historical prices and trading volumes are determined. There have been constant debates questioning the efficacy of this analysis as it does not consider the intrinsic value drawing comparisons from fundamental analysis. Unlike fundamental analysis, trade analysis is built upon stock prices volume of trading rather than balance sheets and other financial statements. Technical indicators like MACD(Moving Average Convergence Divergence) are being used vastly to study the financial scenario here.
Technical analysis work on certain assumptions that its criticizers overlook:
1. Stock market discounts all the factors: This analysis considers the fact that stock market is an ideal representation of the right price of the scrip that depends on company specific factors and all the essential parameters. This is why they consider studying price movement alone as it is a bearing on demand and supply chain of the scrip. With the market price considering all the vital aspects, focusing on price movement is sufficient according to them.
2. The movement of stock prices in trends: Stock prices move in a similar trend generally. The trend established once in share prices follow the same pattern and generally do not diverge from the established trend. The future trend is generally considered to remain the same and is predicted based on similar lines.
3. History is meant to repeat itself. The well known ideology of History repeating itself is considered to be the basic assumption here. Analysts confiding in this theory believe that stock market prices have to repeat it. The whirls that take the market to sudden highs during a bull market will be repeated and vice versa in case of bearish market. It is on the foundation of this repetition behavior of market that trade analysis works.
Investors can benefit from Trade analysis if they learn to follow patterns as it enables one to time the market to one's benefit. Other than stock market, Trade analysis is being considered in other markets including commodity, currency and other markets. While technical analysis is quite an efficacious way of judging market and predicting the future, it is surely not a flawless science and may not always tend to be accurate. Hence, it is recommended that one always consider both the analysis i.e. financial analysis and Trade analysis before taking any major decisions.
This is a guest article by Kotak Securities.
About Kotak Securities:
Kotak Securities is one of India's leading stock broking firm offering stock trading, mutual fund and IPO investing services along with a research division specializing in Sectoral research and Company Specific Equity Research.Express your views on their Facebook Page and Twitter Handle (@KotakSecurities) or you can also browse through their various videos on YouTube and Slide Share.
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