What exactly is technical analysis?

“Technical analysis is the study of market action, primarily through the use of charts, for purpose of forecasting future price trends” – John J. Murphy

Technical analysis works on the assumption that the price reflects everything that is known about a particular market whether it be a currency, commodity or individual share price. If a new event occurs that affects the price, the market will very quickly adjust to this new development or piece of information. So, rather than trying to forecast the myriad of component factors that together affect the movement of any one share or market, technical analysts just look at the price itself.

The two central tenets of technical analysis are:

• Prices tend to move within trends which appear more often and persist for longer than the laws of chance would allow

• History repeats itself

The techniques involved in technical analysis make it a very useful money management tool i.e. it helps crystallise when you should be buying into a market or taking some profits.

Technical analysis does not try to assess the intrinsic ‘value’ of a share, instead it acts as a radar screen picking up on the forces of supply and demand that are either driving the price up or down. By monitoring momentum, technical analysis provides clear signals about when is the best time to buy and sell shares which, after all, is the key to successful investment.

For a more detailed explanation of how technical analysis works and how it can help maximise stock market returns send off for The IRC Guide to Share Price Evaluation, pp28 (price £15). click here for an order form.

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