TECHNICAL GURU
CHIEF TECHNICAL ANALYST
[email protected]
Q. Dear Sandy, what is technical analysis?
A. There are two broad schools of thought when it comes to making a decision about when to buy and sell a security in the financial markets. Firstly, there is fundamental analysis, which essentially involves looking at the overall economy, analysing and understanding companies’ earnings, assets and liabilities and using all of this information to determine the value of a stock. The second is technical analysis, which ignores the above and follows price movements and volumes of trades only. Technicians – sometimes known as chartists – are more interested in studying chart patterns and trends to determine future price levels along with potential support and resistance levels. The chartist is not interested in the value of a stock, but only in the direction in which the stock is going to move and how far it can move without being stopped out for a potential loss. There is an old saying that “fundamentals tell you what, and technicals tell you when”.
Q. Dear Sandy, why is technical analysis so popular?
A. Psychologists note that most people are visually orientated. Because of this, the brain can take in greater information at a glance. Since we look at charts, this supports technical analysis. Remember the old adage: “a picture is worth a thousand words.” Well, with technical analysis we are looking at pictures instead of reading through a thousand words to make a decision. Similarly, by using charts we speed up the process of finding potential trading opportunities. With charting software now easily accessible through trading platforms such as City Index, one can quickly scan through different markets in a matter of minutes, rather than hours. Interest in technical analysis is growing so fast that it is now becoming an essential part of a trader’s toolkit.
Q. Dear Sandy, how do I get started?
A. There are plenty of books on technical analysis and charting techniques. Instead of getting overwhelmed by trying to learn too much in one go, it would be better to take the process one step at a time. The good news is that you can make this as simple or as complicated as you want. Of course, simple is better. Over the next few months we will be covering the essentials of technical analysis along with simple charting techniques in this column. So, if you want an extra skill that will help you to read price movements in a quick and efficient way, then it’s worth thinking about technical analysis.
Learn more about technical analysis with Sandy at his free City Index seminars.