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Technical Analysis

The easiest form of financial analysis. Why? As long as you can read, write and do simple mathematics, you can do technical analysis. There are thousands of websites that provide information on technical analysis, some even provide free training !

The basic foundation of technical analysis is known as Dow Theory. This theory has been casted in stone by Charles H. Dow from 1900 to 1902. Dow believed that the stock market as a whole was a reliable measure of overall business conditions within the economy and that by analyzing the overall market, one could accurately gauge those conditions and identify the direction of major market trends and the likely direction of individual stocks.

There 6 principles of Dow Theory;

  1. The Market discounts everything. The movement of prices does not depend on information; past, present or even the future. Also known as, Random Walk Theory.
  2. Prices move in 3 trends, they are; Up trend, Down trend, or Side ways (ranging).
  3. Trends have 3 phases, they are; Initiation, Accumulation, and Excess.
  4. Market indexes must confirm each other. Industrial Index and Transportation Index must confirm each other.
  5. Volume must confirm trend. When the index goes up , the volume of transaction must also go up.
  6. Trend remains in effect until clear reversal occurs. The trend will continue until there is a very clear or strong signal that proves otherwise.

Based on the above tenets , or principles, we now have technical analysis. A technician, technical analyst, works by studying charts. Like below;

Line Chart Bar Chart Candlestick Chart
line bar-chart candlestick

By analysing charts, a technician can predict where the market is going; short term, medium term or even long term.