Technical Analysis Simplified #1
Hello all!
What we'll be doing in this series is giving you some very brief lessons on Technical Analysis that will hopefully make the topic less frightening/overwhelming and make it easier to understand. We'll have a TA guide developed later on, but just think of this series as a "beginner" series developed with the purpose of giving you a very broad overview in preparation of a more detailed guide at the "novice" level.
Let's get started!
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First thing, understand what "Technical Analysis" means. To understand what TA means, we first need to know its direct counterpart, Fundamental Analysis. In the stock market (let's ignore crypto for now because it's so new and the FA rules for it are very different), FA refers to the analysis of the forces affecting the economy as a whole as well as individual companies. When an investor looks at a company through an FA lens, they're looking at the company's financial data, their management and its efficiency, their business concept and revenue model, as well as their competition. They would also look at supply and demand forces for the products/services offered by the company. In the end, what the investor wants to figure out is, what's the stock's fair value and is it currently undervalued? (meaning investment opportunity)
Which takes us to the next point: market efficiency. Both FA and TA operate on the assumption markets are overall efficient, but that there will be anomalies, meaning that the stock's price is not always an accurate reflection of its fair value and thus presents investment/trading opportunities. For example, if through FA I determine that a share in Company A is $10, and its current market price is $5, that means that it's severely undervalued, and this presents a really good investment opportunity, because I'm assuming that the market forces will eventually push the price to its fair value.
But, even if you find that the stock's price is an accurate reflection of its fair value, but you determine that the company is doing really well, pays really good dividends, and is likely to stick around and continue being successful, you could still invest, preferring to put your money in it rather than leaving it in the bank - fundamental analysis is a whole beast in and of itself, we're just giving a very very broad overview here. We'll come back to it later.
Now, how is TA different from FA? One very simply way (oversimplified for the sake of conversation, it's more complicated than this) to look at it would be, if FA tells you WHAT to buy, TA can tell you WHEN to buy. TA is basically the examination of the price action of a stock using CHARTS to hopefully forecast the future of the stock's price.
TA looks at 3 things, primarily:
A) Price
B) Volume
C) Open Interest
Almost every single TA indicator that you can think of is a derivative of one or more of these 3, or even only the first 2, price and volume. The basic question for TA is, are there more buyers or sellers? That's it. Which is why you might sometimes hear technical analysts say "what" is more important than "why", meaning when looking at charts, we're more concerned with "what" happened to the price, rather than "why"
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Let's stop here and pick it up again in the second installment of this series!
As always, if you have any questions, don't hesitate to reach out via email or through our Telegram group! (links below)
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