Technical Analysis

Basic concepts for the technical contracting in the stock exchange market

Fundamental analysis is focused on the factors of offer and demand that are underlying on the variation of the prices. This is why they say that this approach is dedicated to study the causes of such variations on the prices. On the other hand, the technical analysis studies the effects of the offer and demand; that is that what it does is to study the own movements of the prices.

In fact, the technical analysis is also denominated as charting or as graphic analysis because, in essence, it is based in the drawing of graphics (charts) representing the variations in the prices. Technical analysis gives all the factors that influence the market (from the natural catastrophes to psychology of negotiation) it has an immediate reflex (positive or negative) on the prices.

Said this, we can now say that the chart analysis is used for at least three different situations:

1. To forecast movements of prices. The technical analyst tries to predict the variations of prices, supported only in what the charts indicate, or by using the fundamental analysis.
2. Choosing the most precise moment. The chart analysis is much better than the fundamental to determine accurately when to buy or sell.
3. Indication of tendencies. If movements of the market reflect any of the influence exercised upon it, variations of the prices can be considered as an indicator of tendencies and may be used in two ways. First: the technical investor may buy or sell without stopping to think of why the prices are moving in one direction or the other. Second: a strange movement of the prices can be taken as a sign that some factor has not been taken into account by the fundamental analysis and that the situation has to be studied some more.

Technical analysts uses two working premises:

1. That the movements on the market follows some tendencies, and
2. That tendencies persist

The reasoning is that the market reflects all the influences: the prices do not move in a fortuitous way, but that they follow some determined tendencies. The identification from the beginning of one of these tendencies puts the investor in the disposition of taking the appropriate measures. The charts are the tools used to follow the price movements and by it to determine the tendencies.

It is said that an image is worth more than a thousand words; well, this is the principle when using the stock exchange market charts. An analyst can make a list of prices for studying, but nothing is clearer than a chart of tendencies and of their changes.

If well the charts permit us to appreciate more clearly the former movements of prices, there are many ways to interpret the chart in a way you can predict future movements.

The technical analyst uses two types of charts: the chart with bars and the dotted and figures chart. The chart with bars is the most common and it can incorporate the time factor. The dots and figures chart can only reflect prices.