What Is Technical Analysis?
Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. Just as there are many investment styles on the fundamental side, there are also many different types of technical traders. Some rely on chart patterns; others use technical indicators and oscillators, and most use some combination of the two. In any case, technical analysts' exclusive use of historical price and volume data is what separates them from their fundamental counterparts. Unlike fundamental analysts, technical analysts don't care whether a stock is undervalued - the only thing that matters is a security's past trading data and what information this data can provide about where the security might move in the future.
The technical analysis is based on three assumption or principles
- The Market Discounts Everything - Technical analysts believe that the company's fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market.
- Price Moves in Trends - In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it.
- History Tends to Repeat Itself - Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.
Aspects of Technical Analysis
- Selection of process/ technology – The choice of technology also depends upon the quality and quantity of the product proposed to be manufactured. Choosing the latest technology, it must be seen that the technology has been proved successful for large scale production. Technology can be purchased outright if the cost of acquisition is affordable
- Scale of operations – it is signified by the size of plant. The plant size mainly depends on the markets for the output of the project. Economic size of the plant varies from project to project. The final decision on the plant size is circumscribed by a number of factors, the main factor being the promoter's ability to raise the funds required to implement the project.
- Raw material – The manufacturing process and the machinery/equipment to be used also to a larger extent depend upon the raw material, the type of raw material to be used should be chosen carefully after analyzing various factors like the cost of different raw material available, the transportation cost involved e.tc
- Technical know-how –Agreement should be executed between the project promoter and the know-how supplier incorporating all essential features of know-how transfer. The agreement should also include penalty clause for non-performance of any of the condition stipulated in the agreement.
- Collaboration Agreements – If the project promoters have entered into agreement with foreign collaborators, the terms and condition. The collaboration agreement should have necessary approval of the government of India and does not infringe upon any right.
- Product mix – Customer differ in their needs and preference. In order to enable the project to produce goods of varying size and quality as per the requirements of the customers, the production facilities should be planned with an element of flexibility.
- Plant and machinery
- Selection of plant and machinery - The machinery and equipment required for a project depends upon the production technology proposed to be adopted and the size of the plant proposed. Capacity of each machinery is to be decided by making a rough estimate.
- Procurement of plant and machinery – Plant and machinery form the backbone of any industry. The quality of output depends upon the quality of machinery used in processing the raw materials.
- Plant layout – Plant layout is the arrangement of the various production facilities within the production area. Plant layout should be so arranged that it ensures steady flow of production and minimizes the overall cost.
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