What Is Technical Analysis?
Technical analysis is a method of evaluating securities by studying the statistical data generated from market activity primarily past prices and trading volume. Unlike fundamental analysis, which focuses on determining a security’s intrinsic value, technical analysis centres on identifying trends, patterns, and signals that may suggest future price movements.
Technical analysts rely on charts and various analytical tools to interpret market behavior. Some traders emphasize chart patterns, while others use technical indicators and oscillators. Many combines both approaches to refine their trading strategies.
The defining characteristic of technical analysis is its exclusive use of historical price and volume data. Unlike fundamental analysts, technical analysts are not concerned with whether a stock is undervalued or overvalued. Instead, they focus on how the market has behaved in the past and what that behavior implies about where the security might move next.
Core Principles of Technical Analysis
Technical analysis is built upon three fundamental assumptions:
1. The Market Discounts Everything
All available information including a company’s fundamentals, broader economic conditions, and investor psychology is already reflected in the stock’s price. This perspective eliminates the need to separately analyze these factors, making price movement the primary focus. Ultimately, prices are viewed as the product of supply and demand in the market.
2. Price Moves in Trends
Prices tend to move in identifiable trends rather than randomly. Once a trend has been established, it is more likely to continue in the same direction than to reverse. This principle forms the foundation of trend-following strategies, which aim to capitalize on sustained price movements.
3. History Tends to Repeat Itself
Market behavior is strongly influenced by human psychology, which tends to be consistent over time. As a result, price patterns observed in the past often recur in the future. Chart patterns some of which have been studied for over a century remain relevant because they reflect recurring investor behavior and market cycles.
Aspects of Technical Analysis
When conducting technical analysis for a project or business venture, several aspects must be carefully considered. These factors directly influence the feasibility, efficiency, and long-term sustainability of the project.
1. Selection of Process/Technology
The choice of technology depends on both the quality and quantity of the product to be manufactured. It is important to select proven technology, particularly for large-scale production, to minimize risks. If financially feasible, acquiring technology outright ensures greater control and reduces dependence on external suppliers.
2. Scale of Operations
The scale of operations is determined by the size of the plant, which is largely influenced by market demand for the project’s output. While the economic size of a plant varies by industry, the ultimate decision depends on the promoter’s ability to mobilize the funds required for implementation.
3. Raw Materials
Raw materials form the foundation of the production process, and their availability and cost are critical. The choice of raw material should be made after analyzing various factors such as cost, quality, availability, and transportation expenses. This decision directly affects the machinery to be used and the efficiency of the manufacturing process.
4. Technical Know-How
For projects requiring specialized expertise, a formal agreement should be executed between the promoter and the technology provider. Such agreements must clearly define the scope of know-how transfer and should include provisions such as penalty clauses to safeguard the project against non-performance.
5. Collaboration Agreements
In cases where foreign collaboration is involved, agreements must comply with the regulatory requirements of the Government of India. The terms and conditions should protect the promoters’ rights while ensuring smooth transfer of technology and expertise.
6. Product Mix
Since customers have diverse needs and preferences, flexibility in production is essential. A well-planned product mix allows the project to produce goods of varying size, quality, and specifications, thereby enhancing competitiveness and meeting market demand effectively.
7. Plant and Machinery
- Selection: Machinery requirements are determined by the chosen production technology and plant size. Careful estimation of capacity is essential to avoid under- or over-investment.
- Procurement: Plant and machinery form the backbone of production. The quality and reliability of output depend largely on the quality of machinery used, making procurement decisions critical to long-term success.
8. Plant Layout
Plant layout refers to the physical arrangement of production facilities within the factory premises. An efficient layout ensures smooth workflow, reduces idle time, minimizes costs, and enhances productivity by allowing for steady and continuous operations.
FAQ’s
What is technical analysis in simple terms?
Technical analysis is the study of past price and volume data (usually through charts) to predict future price movements of securities like stocks, commodities, or currencies.
How is technical analysis different from fundamental analysis?
Fundamental analysis looks at a company’s intrinsic value using financial statements, earnings, and economic indicators. Technical analysis, on the other hand, focuses only on price trends, patterns, and trading volume, without considering a company’s fundamentals
Can technical analysis guarantee profits?
No. Technical analysis improves the probability of making informed decisions, but markets are influenced by many factors. It should be used with risk management strategies.
