The World of Technical Analysis

By Kotaro

An Analysis Indicating Sentiment in Market

This presentation is about so-called Technical Analysis, not any market. Neither financial market such as stock market or commodity market is discussed. But the analysis helps dealers of such markets in finding a time of buy, sell, and hold. Interestingly, Japanese merchants established some elements of it long time ago. Though no one should totally relay on the analysis, traders use it because they believe it indicates sentiment in the markets.

What is technical analysis?

Technical analysis is a technique supposedly gives a sign of gbuyh, gsellh and gholdh on an issue by taking only disclosed quantitative data in the past. Let me pick stock market as one of financial market for example. The most popular data consists of gopenh, ghighh, glowh and gcloseh and gvolumeh. Although there are more like volume of remaining gcredit sellh, gcredit buyh, etc., let me omit them for simplicity.

Before the analysis, the five data above are simply result of an issue in the past. After the analysis, it suggests something if properly interpreted. The suggestion and the interpretation are the key many traders who use the analysis are looking at.

Candlesticks (Made in Japan)

See the web site below.

http://traders.com/Documentation/FEEDbk_docs/Archive/0397/Abstracts0397/0397Wagner.html

A Japanese man named Mr. Homma developed the technique for trading then-most precious commodities in Japan, rice, more than centuries ago. The data contains only gopenh, ghighh, glowh, and gcloseh. The set of these four values, when drawn like a candlestick in a certain manner, implies what the trade has been like in the day. But if you connect the candlestick in series, technical analysts feel something at one point for next movement. Do you feel something on the chart like one seen in the web site above?

Trends and Trendlines

See the web site below.

http://www.chartpatterns.com/trends.htm

In the first two concept charts seen in the above web site, it is obvious that gUPTRENDh is more attractive than gDOWNTREND.h But it does not mean you can always get profit on the gUPTRENDh, nor will always lose on the other. You see in the gUPTRENDh the wave contains temporary low that is lower than the previous temporary high and vice versa in the gDOWNTREND.h Draw trendlines by yourself to clarify if the movement is up or not. This is a probably the most important step in the analysis. Confirm gSUPPORTh and gRESISTANCEh in the two charts.

Trends may not continue forever. As you can see in the next two charts on the web site, the trends collapse like one shown as gBROKEN SUPPORTh or gBROKEN RESISTANCE.h In the earlier case, the analysis asks you to sell as soon as possible and the later case remind you the there may be something happens sometime soon. Let us skip the next two in the web site for now.

Moving Averages

A moving average is calculated, in the case of twenty-five day moving average, by dividing sum of gcloseh of past twenty-five working days by simply 25. In the same manner, the moving average of next day is dividing sum of gcloseh of past twenty five from that day by 25, and so on. The series of the moving average forms a curb suggesting a trend.

The analysis suggests daily values usually goes away from the curb upward but may goes back to the curb when it went too far. It also the same when daily values leave the curb downward as well. Technical analysts would say you should watch carefully when daily values went too far away from the curb and get ready to sell or buy depending on the direction.

Important

The analysis has many more techniques involving highly complicated calculation. But no technique assures profit. One of technique popularly used is gIchimokukinkohyoh invented by Mr. Hosoda. You can see the chart on a web provided by some security firms. Though the technique seems sophisticated, still it can not eliminate all risks in the market.

The analysis indicates sentiment in trading behavior because it has no consideration of gfundamentalsh such as changes in net profit, cash flow, etc. It assumes every aspect involving an issue reflects results and thus suggests next movement. Since the assumption is unproven, the technique is not fully reliable. But it is important not to take an action like gbuyh, gsellh, or gholdh without looking at current position of an issue. Suppose you are a trader working for a big financial institution like a life insurance company, do you press a button of gbuyh of an issue at the time of gBROKEN SUPPORTh?