What is Technical Analysis?

This is the study of the action of the market itself as opposed to the study of goods in which the market deals. Technical analysis involves recording the actual trading history of the stock (price fluctuations, volume of transactions in the stock / index) in graphic form and deducing from this pictorial history, a probable future trend. The underlying basis of such analysis is the demand/supply equation.

A good technical analyst could, in fact, interpret the chart of a stock whose identity is not known as long as the trading records are accurate and the data covers a long enough term to enable him to study its market background and habits. (Needless to say, such practice is not recommended).

In technical analysis, the market action discounts everything (with the exception of an act of God or the event of war). Prices generally tend to move in trends and history does repeat itself. This would probably be the premise for technical analysis. It would be pertinent

to note that it is an art (the interpretation of movements is basically a responsibility of the chartist and there could be a yawning gap between two analysts looking at the same chart), not a science (which would have everything exact and equal) but something, which is based on probability – slightly more abstract.

This subject is like an ocean, vast, limitless and so deep that even the best of minds would find everyday a new challenge to deal with so we shall try to do as much justice we can to the subject in the brief period of time that we have. A famous Japanese martial art is known as “Karate” – where Kara stands for empty or air and Te stands for hand which in effect means the art of the empty hand. Similarly if one were to draw a parallel than technical analysis would mean the art of the empty mind but here the term empty needs to be looked at in the form of open so in effect it would mean the art of the open mind. Since technical analysis is a subjective affair and 2 & 2

don’t necessarily add up to 4 one has to be prepared for any eventuality which could go beyond the ordinary and for such eventualities to be successfully anticipated there needs to be a paradigm shift in the thinking and approach of a chartist. Assuming that one is a naturally gifted technical analyst but even then rules of discipline are a must which need to be religiously followed based on the an individuals, fiscal situation, appetite for risk, time frame being followed and the objective to be achieved by indulging in such an activity.

Besides clarity and focus which are basic prerequisites for a certain level of proficiency to be achieved in the realm of technical analysis one can never afford to be befuddled in any sphere however insignificant it may seem. There are some basic areas of difference between investment and trading while a good chartist would know exactly what these variations are to know exactly how deep the water is, failing which there could be serious problems as though both the viewpoints are workable but the inability to distinguish between them could mean heavy losses.

As a pure technical analyst, a stock though representing ownership in a company is not the same thing as the company itself because the stocks of a strong company are rather weak and of a weak company are rather strong. Its extremely crucial to realise that the company and the stock aren’t exactly identical and as a chartist one is only concerned with the value of the stock as perceived by those who either trade in it or own it. Another way of looking at stocks is the dividend angle as for a technical analyst any income other than capital gains or losses wouldn’t have any meaning while paradoxically many stocks, which have maintained a high dividend payout but have significantly eroded their price value.

Another source of confusion is the chartist sitting on a bad trade and assuming the role of a passive investor and the paper loss doesn’t exist until in becomes a realised loss while actually to the chartist, the gain or loss at a given time should be directly related to the closing price of the stock on that particular day. A chartist is not committed to a buy and hold strategy all the time as there are times when it makes sense to hold on to a position for months, maybe even years but there are times when a chartist would need to get out of a stock on the very next day as it would be against the very logic of technical analysis to hang on to a position for emotional reasons against other evidence which suggests weakness.

A change or reversal in the major trend would inevitably bring in a plethora of losses especially to short term traders but once the confusion is cleared in terms of the change in trend, an easy calm should prevail in the mind of the analyst. One needs to keep in mind that whenever in doubt a sensible technical analyst would always look at a bigger time frame to arrive at an conclusion and needless to say, the bigger the time frame, that much more weight the analysis would hold especially when compared to a small time frame.

A chartist is expected to compartmentalise his or her outlook at the same time interlink the various time frames as many times this very interlinking could provide the much-needed answer. What could be a distribution pattern on the daily chart could be the part of a correction on the weekly chart and which could very well turn out to be a minor blip on the monthly chart before the stock continues its uptrend. It needs to be kept in mind that no system has yet been developed that will unfailingly protect a chartist against a loss or at times even a string of losses which in turn will have to be tackled in

learning from the mistakes, if any that is and not let such a turn of events ruin your morale. A person doesn’t become a technical analyst overnight but it comes from experience, sincere and intelligent hard work.

Technical analysis is a subjective art; not an objective science just like it is a mathematical system while of course it does involve mathematics. Technical analysis is intended to look out for the significance of market moves in the light of previous experience in similar cases by means of charts with a complete recognition of the fact that the market is a sensitive mechanism by which all the opinions of all interested participants are reduced by a competitive democratic auction to a single figure representing the price of a stock at an particular moment. The various formations and patterns that which are a part of analysis are not meaningless or arbitrary but they actually signify changes in real values, expectations, hopes, fears, developments in the industry and any other factors which are known to anyone. It isn’t important to know what particular hopes, fears or developments are represented by a certain pattern but it is important to recognise and understand what could be the outcome of such a pattern.