Why Technical Analysis?

The investment universe used to be divided between those using fundamental analysis (i.e. an examination of a company’s financial data, as well assessments of its markets – and management) and technical analysis, which looks at an asset’s price data in the form of charts. The benefits of poring over balance sheets might seem obvious, but what are the advantages of studying price data as represented in a chart? There are several, but the four key benefits are listed below:

  1. The Trend –  Is there a clear and identifiable trend? It’s an important question because the trend – either up or down – shows the prevailing sentiment in the market and, more often than not, attempting to go against that trend can be damaging to long-term returns. The old adage – the trend is your friend – is worth remembering!
  2. Momentum – If a trend is in place, how strong is it? Can it be measured? The answer is that it can and many indicators have been developed over recent decades that attempt to do just that. Common examples include moving averages, the 14-day RSI, various Stochastic oscillators and the MACD (moving average convergence/divergence). An uptrend might be ongoing but the chart-watcher should be aware of any loss of momentum that could bring the move to a close.
  3. Support & Resistance Levels – charts often give strong clues as to where a rally will end, or where a sell-off will reach a conclusion. This might be because the price has reached a level where sellers or buyers have appeared before, or it might have something to do with the test of a well-defined trend-line (as illustrated in the chart for Rio Tinto, below). Occasionally a move will end because the price has risen/fallen by a certain percentage in relation to its previous move, and Fibonacci Retracement Grids help to identify such turning points.
  4. Participation – the degree to which a rally/decline is being driven by volume is a key consideration for the chart practitioner. A fall-off in volumes after a strong move is often seen as an indication that a shift in sentiment is underway and, ironically, when that lull is then followed by a new high/low – accompanied by a significant rise in volume totals – a reversal signal might well follow.

Combining these four elements provides market participants with a powerful tool to guide them through what can appear to be random movements, and sudden spikes/corrections. You don’t have to choose between technical and fundamental analysis – and most investors will feel inclined to bring the two together in some way. As John Bollinger once wrote, when fundamental and technical analysis are combined what one is left with is ‘rational analysis‘.

The Technical Trader provides investors – both professional and private – with a daily technical commentary of financial markets. The aim is to identify the prevailing macro trends, i.e.  in leading indices, currencies and commodities, as well as to drill down into charts for individual stocks and shares (predominantly in the UK equity market) to offer a micro view as well.

Different investors have different needs – The Technical Trader offers various products to meet those needs, and we trust that you will find the analysis tools you need on this site.