Wednesday, March 16, 2016

Looking Beyond Charts: A Holistic Approach to Technical Analysis

Give one stock chart to 10 different chartists and you could have 10 varying interpretations. This is because there are biases unique to each analyst. Each has developed his or her own method(s) of judging or evaluating stocks including risk parameters. What appears attractive to a swing trader might not be acceptable for a position trader, vice versa.
A lot of traders think that Technical Analysis is just merely reading or interpreting price charts and patterns. In reality, technical analysis can also include statistical, sentiment and behavioral analysis.
Classical technical analysis use basic indicators such as chart/bar patterns, candlesticks, support and resistance, oscillators, market breadth and cycles.
Statistical analysis involves quantitative methods.
Sentiment Analysis includes psychology of market participants like insider trading and seasonality of stocks (based on macroeconomic indicators or global market conditions).
Behavioral Analysis studies market reaction like herd behavior everything that is related to emotions, expectations and biases of other market participants.
One can combine the methods mentioned above.
Every bullish interpretation can have a corresponding contradicting bearish interpretation.
Remember that there is no perfect system. The market decides on its own and therefore as a trader, you have to be prepared for both positive and negative scenarios. Risk management is vital.