Technical Analysis for beginners

In our previous lesson we discussed fundamental analysis, wherein you determine company strength and future profitability based upon actual financial information about a particular company. This lesson will move on to another major method used in analyzing a company and its stock price, technical analysis. Technical analysis employs the use of charts, to spot things such as trends or patterns. Unlike fundamental analysis, this method relies upon analyzing volume in trading in the markets and the individual investment, along with prices.

Although technical analysis has been referred to as pseudoscience, users hold that even if technical analysis cannot predict the future, it helps to identify trading opportunities.[6]

Most large brokerage firms use both methods in analyzing a company.

Let me give you an example. I may know a particular firm is well managed, not over loaded with debt, they have cash in the bank, they’ve had consistent sales, and the overall company is a good one. At the same time I’ve watched the stock price over the last year, and know that stock was at around $50 just a month before, but now it has dropped into the low $40’s. I would think, heck, the price is right and poised to rebound, this is a great buying opportunity. Now, the above was grossly oversimplified, but its point should be clear to you, it is necessary in many cases, especially when dabbling in foreign currency trading, to use methods such as charting to get a clearer picture.

Here is yet another way to look at this. Take the oil industry for example, recently there was an enormous bubble in the market that popped, oil at its peak was selling for around $150 a barrel, but now it is back down to around $40 a barrel. You could see that its price has leveled off, barring a complete economic collapse, it probably won’t go much further down. Having said that, you could also take a leap and say if history repeats itself, the price of oil won’t stay this way too long, I’m buying in now. That’s the 10,000 foot view of technical anaylsis, in reality it is much more complicated, we will discuss this in greater detail in further lessons.