Technical Analysis free essay sample

Technical analysis Prices of securities in the stock market fluctuate daily on account of continuous buying and selling. Technical analysts believe that stock prices move in trends and are never stable. Therefore, past prices and volume data provide indicators of future price movements and help in investment decisions. John J. Murphy, an  American  financial market  analyst, is considered the father of inter-market  technical analysis. Many fund managers and traders are skeptical about the usefulness of technical analysis mainly because there is no theoretical base and random walk for the stock prices. Therefore few research papers have been observed in order to know the applicability and profitability of technical analysis. LITERATURE REVIEW Technical analysis does not give the intrinsic value of a security, but use charts and other tools to identify patterns that can suggest future activity. Blume, Easley and O’hara (1994) showed how volume and prices can be informative and benefits traders who use information contained in market securities. We will write a custom essay sample on Technical Analysis or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Park and Irwin (2004) reviewed the evidence on the profitability of technical analysis by reviews survey, theoretical and empirical studies regarding technical trading strategies. Similarly, profitability in the US equity market was seen with the help of candlestick technical analysis by Marshall, Young and Rose (2007). Gomathi and Matheswari (2011) analysed the equity shares of SBI with the help of technical analysis to discover the trend in the future. Chitra (2011) also technically analysed selected stocks of energy sector in India and draw a comparison among them for the purpose of investing. STUDY Blume, Easley and O’hara examined the role of volume and trade information, employed to investigate how market clearing prices reflect underlying information and how traders learn from prices. To investigate they used simplified versions of models developed by Brown and Jennings and Grundy and McNichols that address the role of price data in technical analysis. They said that an agent can trade in risk-free and a risky asset and there is no exogenous supply of any asset. They investigated how technical analysis can be valuable to traders in an economy full of uncertainties. A trader who does not engage in technical analysis cannot fully infer current information from the current market statistics. The unique feature if their model was that volume captures the important information contained in the quality of traders information signal. Park and Irwin firstly used survey study by directly investigating market participants’ behaviour and experiences. The result indicated that most traders were unsuccessful in futures trading, regardless of their scale and knowledge. Apart from survey they used The Martingale Model which says that a sequence of price of an asset is a fair if it has unbiased price changes. Efficient market Models implies instantaneous adjustment of price to new information by assuming that current price impounds all available information. Noisy Rational Expectations Model assumes current prices do not reveal all available information because of noise. After the study it was observed models like martingale model and random walk model are not feasible and in contrast other model like noisy rational expectations models, disequilibrium model and feedback models there is profitable trading opportunities. They also studied technical trading system comprising a set of trading rules that can be used to generate trading signals like moving averages, chart pattern studies, channels (support and resistance) and filters. Conclusion drawn was that technical analysis has been widely used by market participants to determine price movement for time horizons upto 6 months. Candlestick technical analysis involves the consideration of relationship between open, high, low and close price. It has a short-term focus and profitability of candlestick trading strategies is tested using t- statistic and bootstrapping methodology. Marshall, Young and Rose checked the profitability of candlestick technical analysis using individual stock data for those companies that were included in the Dow Jones industrial index during 1/1/1992-31/12/2002. They assumed that a trade is entered at close on the day after a signal and ten-day moving average to determine the prior trend for bullish and bearish reversal patterns. It was found that candlestick trading rules are not profitable when applied to DJIA component stocks. Neither bullish or bearish candlestick single lines provided better market timing signals. Therefore, basing decisions solely on these techniques does not seem sensible. For technical analysis, Chitra analysed the daily price movements of the 10 power sector actively traded companies in NSE was absorbed for 3 years. For bets calculation, closing price of companies in NSE and closing value of NIFTY. Apart from beta, moving average and relative strength index tools were used. On the baisi of beta, moving average and RSI it was suggested that ONGC, TATA power, GAIL, CAIRN could be bought because higher net profits. Investors were advised to also take into account macroeconomic factors while investing. Gomathi and Matheswari undertook technical study of SBI stock to analyse price movement and forecast future trends with the help of charts. Fifty days Simple moving average, exponential moving average and relative strength index were used as tool to analyse the data for the time period Nov. 0- Apr 11. In the study it was found that investors should sell security when price has increased and buy whenever there is drop in price. CONCLUSION Technical analysis gives investor a better understanding of the stocks and also gives them right direction to go on further to buy or sell the stocks. It can be applied to any market with a comprehensive price history. Technical analysis or charting techniques is considered to be as a supplement to fundamental analysis of sec urities. It can offer great insight but if used improperly, they can also produce false signals Even though technical analysis is enough for making decision in stock market, simultaneous usage of both fundamental and technical analysis will reduce errors in forecasting future prices. BIBLIOGRAPHY Books Prasanna Chandra, investment analysis portfolio management, 3rd edition, 2008. Research papers Blume L. , Easley D. and O’hara M. ,1994. Market statistics and technical analysis: the role of volume. The journal of finance, vol. 49, no. 1, pp- 153-181. Chitra R. , 2011. Technical analysis on selected stocks of energy sector. International journal of management business studies, vol. 1 issue 1. , pp-42-46. Gomathi T. and Matheswari R. , 2011. A study on technical analysis of SBI equity share. Golden research thoughts, vol 1 issue 4. Marshall B. R. , Young M. R. and Rose L. C. , 2007. Market timing with candlestick technical analysis. Website- http://ssrn. com/abstract=980583 or http://dx. doi. org/10. 2139/ssrn. 980583 Park C. and Irwin S. H. , 2004. The profitability of technical analysis: a review. agMAS project research report no. 2004-04. Website-   http://ssrn. com/abstract=603481