Assistance In Making Investment Decisions - Technical Analysis

If you want to invest in the stock market, it is worth taking care of the necessary knowledge. Technical analysis of listed companies should be carried out before deciding to purchase any shares.

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Definition

Technical analysis is the oldest form of analysis in the stock market. It was used as early as the 17th century by Japanese rice traders to analyze the price trend of rice.

Technical analysis studies, mainly using graphical charts, how the prices of securities will develop based on the analysis of their changes in the past. This technique involves comparing current price movements with similar price movements in the past in order to predict the likely outcome of such price movements. When we talk about technical analysis, we mean studying the behavior of stock prices in order to minimize losses and maximize profits. The purpose of this analysis is to adapt to the current situation in order to earn as much as possible. This analysis is based on the analysis of human behavior. Therefore, investors and speculators react the same way to the same types of events every time.

Pillars of technical analysis

Analysts can use four main factors to develop an investment strategy: price, trading volume, time, feelings

Price is the most important area of analysis. We can measure profits and losses arising from price differences between purchase and sale.

Trading volume analysis is primarily distribution and accumulation, market width, number of open positions and concluded transactions.

Time is seasonality, the length of the cycle, as well as the mutual arrangement of formations and trends.

Feelings are subjective and determine whether most investors are going too far in one direction.

Technical analysis of financial markets is used to determine the likely price of a given stock, using historical price data as well as other factors that affect it.

There are various programs for technical analysis available on the market, a large part of them is available completely free of charge, also through specialized stock market portals that provide charts and data and have a module for technical analysis.

Technical analysis is based on the idea that prices follow trends. They are located in certain directions of changes in market prices. Therefore, they depend on how much a given trend will continue and when it will reverse or a new one will be established.

Tools

Two groups of tools are used in technical analysis to carry out analyses. These are charts of stock prices in the past and technical indicators. Charts reveal certain graphical patterns that show how stock prices have developed in the past. These are called technical patterns and tend to repeat themselves. Thanks to this, they make it possible to forecast the direction of changes in share prices in the future. Technical indicators, on the other hand, show the current state of markets.

In technical analysis, various indicators are used to show market behavior. It's a certain data field. It is plotted on the graph as a curve, line, histogram or point. Technical analysis indicators are often derived from the price rate.

Often, especially novice traders, they try to use as many indicators as possible and combine them all together to get the best picture of the market and increase the success of their trade. Unfortunately, using more indicators on one chart does not increase the chances of success, on the contrary, it hinders it, because the investor may receive conflicting data.

Technical analysis indicators

We distinguish e.g. the following categories of technical analysis indicators:

Oscillators – a group of indicators that “oscillate” between certain values. They are used in various ways, e.g. to read discrepancies, neutral market conditions or estimates. They are effective, especially when there is no clear market trend. Additionally, oscillators warn when a trend is losing momentum before it is visible on the price chart. In turn, divergences, i.e. differences in the behavior of the price and the oscillator, are a warning before the end of a given upward or downward trend. The most popular oscillators are, for example, the indicator of change (ROC) and the MACD.

Momentum - these are indicators based on the current momentum of the price - its momentum, speed and strength. Momentum indicators measure the strength and speed of price movements. An example of such an indicator is the RSI.

Trend indicators – can better identify the current trend and possibly its changes. Usually, these are periodic indicators that are counted several episodes back in time.

Source: Borowski K. (2017), Analiza techniczna. Średnie ruchome wskaźniki i oscylatory, Zaremba A. (2014), Giełda. Podstawy inwestowania,