For any business analysis, it’s always important to look ahead. This would involve creating business plans for the company’s future ventures. However, creating a plan requires an intense and careful study and analysis of the industry and market that the business analysis is a part of. This includes the market’s behavior, such as trends, stock prices, and the like. This serves as a challenge for company executives, as the market can often change drastically. One approach that investors like to use to make stock trading decisions is through technical analysis.
Generally speaking, technical analysis is used to forecast prices. Investors would need to know whether their investments will garner positive outcomes in the long run. This would involve studying the competitive landscape of the given market. However, it’s not all about looking into the future, as this type of analysis may also be used to study the past. This is because past occurrences are bound to repeat itself in the future. It also known that technical analysis has generated significant excess returns in the stock market.
For starters, a trend represents the demands in the market. It’s the general direction in which a given market is headed towards. These trends are used to identify the needs of the market, which will then be reflected in a company’s business plan. However, it’s not always easy to identify trends. This is because trends don’t move in a consistent direction but instead, they go through the highest of highs and the lowest of lows. These trend lines play a significant role in technical analysis for trend identification and confirmation.
Fundamental analysis example and technical analysis are two different terms used in forecasting the growth trends of stocks. In simple terms, fundamental analysis centres on financial statements, while technical analysis involves analyzing the industry’s stock charts. Additionally, technical analysis concentrates more on the statistical analysis of price movements in the market. The two also have different objectives. Fundamental analysis think long-term investments in stocks, while technical analysis cater to a more short to medium-term trades.
Since technical analysis is based on the historical prices, meaning the past and current prices in the market, any sudden change can greatly impact the predicted price. This, therefore, makes technical analysis only suitable for short-term indications. There’s also the issue of biased opinions from analysts.
This happens when one technical analyst’s views differ from another’s opinion. Another disadvantage from using technical simple analysis is the role played by consumers. Certain events that occur in the society can cause major reactions to the stock market. For instance, overreaction can cause price movements to go above or below the fundamental value of the standard stock price.
There’s also the possibility of an underreaction, wherein prices are static. There is no clear explanation for such phenomenon, except that it happens because of how consumers move in the market.