A beginner's guide to Technical Analysis

In the realm of investing, there exists two philosophies to shortlisting investments,
Fundamental Analysis
Technical Analysis

Fundamental Investing is best defined as
"analyzing the financial statements, health, management, competitive advantages, competitors and markets of a given firm to decide the value of a firm"

while technical analysis involves:
"analyzing the movement of price and buying/selling volume to predict the direction of stock movement"

In today's post, I will be outlining the basics of understanding technical analysis with links to videos of "experts" showing you how its done. The reason why I have picked to present technical analysis over fundamental analysis is due to the relative ease to learning the basics of technical analysis as well as the widespread use by traders that trade everyday (*Day Traders) in addition to other reasons of which I will outline as I go.

An image that comes to mind when someone starts conversing about the stock market is more often than not, a line that traverses horizontally on a 2D plane like so:



An extreme Fundamentalist (Fundamental analyst) would use graphs as a way of proving that his analysis was correct for choosing a company that is undervalued.
However, the flaw with fundamental analysis is that it indicates when you should enter the market and not when you should exit. This potentially minimizes gains from capital gains (*Selling at a higher price) as a "correction in the market" (*when the market is overpriced and traders start selling) would erode the value of an investor's portfolio as there is no exit plan to capitalize on capital gains.

A Technical Analyst invests similarly to a poker player, he folds his invests when the cards are not playing to his favor but plays the hand when it is in his favor. While technical analysis predictions are not written in stone and can be completely wrong, there is always an exit plan to minimize losses. Disposing bad eggs and keeping good ones is how a technical chartist grows his investments.

Drawing Lines
to draw a line, connect a HIGH to another HIGH for RESISTANCE (*a line that Resists upward movement) or a LOW to Another LOW for SUPPORT (*a line that Supports upward);
here is an example:





lines can also be drawn horizontally by connecting key turning points in the stock price movement (*reversals: when a stock makes a 180 turn), eg.



As you can see, the stock movement is consistent with the lines drawn;
However, like all barriers and walls, lines too break down after being beat repeatedly or after being rammed by an object travelling at high speed (*the longer candles indicate growing momentum towards a direction) or by objects with higher weight(*days when news relevant to the company is published)

Now that you have a slight grasp of drawing lines, go ahead and give it a try on http://www.prorealtime.com/en/, just look for a company, and familiarize yourself with drawing lines!

HOMEWORK:
Go to youtube and look for FreeTradingVideos
Watch this everyday!
http://www.youtube.com/user/FreeTradingVideos#play/uploads/1/uITQueOWg2c
And you will see how the experts plot their charts

You can also access their website at www.freetradingvideos.com where you'll find a basic tutorial on how to get started on technical analysis.