This text is an opportunity to gain insights into the practical use of technical analysis and understand market behaviour by identifying price trends and key entry and exit points. As a result, technical analysis can assist in decision-making to enhance portfolio performance and maintain investment strategy in challenging time.
Difference between Technical and Fundamental Analysis
The goal of fundamental analysis is to determine a fair price for a company’s stock by studying how key company data develops over time. It requires a knowledge of accounting, finance, and economics. For instance, fundamental analysis requires the ability to read financial statements, an understanding of macroeconomic factors. It examines the factors affecting the price
Technical Analysis is used to forecast the price of a share, which says that the price of a share is based on the interaction of demand and supply forces, operating in the. Market Action reflect everything (all kind of news, political, company special etc). Prices moving in trend and history repeats itself. It means each kind of Formation in the past will be working in the future. TA not concerning the reasons why price goes down or up. By studying the chart with special indicator an to understand which direction it likely to go.
The principal of Technical Analysis
Based on Rule from Charles Dow and Edward Jones (1882). The write the ideas in Walls Street Journal, which mostly famous as Dow Theory. The main rules are:
Market prices reflect every possible factor that affect supply and demand
Market has 3 trends: primary, secondary (3weeks to 3months) and minor (less the 2weeks)
Volume must confirm the trend
Trend is existing till it shows sign to reverse. Its only 3 kinds of movement in market:
- sideways (trendles)
- up trend
- downtrend
Mostly important lines are trend lines (shows price direction), line of resistance and line of support (selling pressure overcame buying).
Is existing many Types of charts: Kengi, Renco, Point and Figure, Candlesticks and Price Profile. It’s the period, just different presentation of it. Take one which fills common for you.
Where to start
Before you start examining the stock or you need a confirmation of your strategy to the right moment, make sure your determinate the „health“ of the market. Should have a look to kind of Sentiment Indicator: for example, Consumer Sentiment. Which based the Dates of 5000 Households in USA. How to read:
we are talking about extremes Zones here: under 50 is sentiment negative (Stocks are down) and over 95 too positive, stocks likely to fell down. May be seen on doth chart the correlations.
Also, Market Breath is good indicator for the market. Is based on the number of stocks in up trend to falling stocks. The rules are under 20 is time to buy and over 80time to watch for correction.
How it goes
Let’s a sum you decide everything goes in right direction, and now to fine the right stock.
The best way to start is have a look to Performance of ETF of branches. Better to see just divide them by Index.
Sector is found.
It might make sense to check not only one, but two or more sectors here.
Now just compare each stock to sector ETF. You got a winner! Do the same with other sectors too. Find the outperformers.
Have a look to the chart.
Draw your trend lines and make decision.
This is simplifying way to find right stocks in Stock Universe in right market phase.
My advice is: polish your skills by reading books. Before start to invest test your strategy by papier trading. And by building your portfolio keep in mind the Intermarket Correlation of course.
Author: Julia Thilenius
The author is managing partner of the bank-independent asset management company Dr. Thilenius GmbH in Stuttgart. The company is regulated by BaFin.
