So what is technical analysis?
This is a popular form of security analysis that uses price and volume data for decision making before
diving into its applications.
Let's first understand some of its principles.
The three main ideas of technical analysis are first, supply and demand for a security determine its
price.
Second, change in supply and demand for a security causes a change in its price.
And third, prices can be projected by charts and other technical tools.
Now let's take a look at some of the assumption behind this method.
The main tenet of technical analysis is that the valuation of a security is a result of the activity
of rational and irrational market participants.
In other words, some investors are led by their emotions or animal spirits.
A bull represents investor optimism, while a bear represents investor pessimism about a particular
security or the market in general.
When investors feel bullish, stock prices tend to go up.
Reversals.
When investors feel bearish, stock prices go down.
Because of such a social behavioral phenomenon in the market.
This form of analysis assumes the market is not always efficient.
So technical analysis can be thought of as the study of collective investor psychology or sentiment.
OC as historical behavioral patterns are captured on the charts showing price and volume data technicians
believe the best way to predict the future price of a security is by studying how investors behaved
in the past.
Based on these assumptions, technicians can read the charts by looking for repetitive price patterns,
then building projections of future price movements.
Great.
Now we are ready to understand its applications.
Technical analysis is widely used in the analysis of commodities, currencies and futures.
This is because these assets don't have an income flow, such as a dividend or yield to utilize fundamental
analysis.
We can apply this methodology only when we have readily available price and volume data.
This is the case when assets are traded on some sort of public exchange, such as a stock market.
A problem may arise if the assets listed have low trading volume.
Such illiquid assets are not optimal for technical analysis.
The improved liquidity of financial markets, as well as the relatively easy access to price and volume
data, have contributed to the increasing popularity of technical analysis.
Excellent.
Please note that some investors use technical analysis as a standalone tool for their investment decisions.
Others combine this system with fundamental analysis.
In any case, technical analysis is used as an indicator for optimal price entry and exit points of
a security.
Of course, it may lead to uncertain results, as with any other activity related to projecting future
performance.
Outstanding job.
Next, we'll look at different charts, graphs and other tools used in technical analysis.
Thanks for watching.