Technical Analysis
According to Murphy, " Technical Analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends".Market action refers to Three principal information - price, volume and open interest.
Technical Analysis ignores the Fundamental Analysis i.e Intrinsic value of securities.
(a) If price trend is upward :- Purchase is recommended even if current price of securities is higher than Intrinsic value of securities.
(b) If price trend is downward :- Sale is recommended even if current price of securities is lower than Intrinsic value of securities.
Fundamental Principle of Technical Analysis.
The market price of a security is determined at the intersection of the demand and supply of securities.
The demand and supply are influenced by various factors, both fundamental as well as emotional.
The price moves in a trend. Movement is in a series of up's and down's. The main direction of the price is interrupted by short term counter movements. These counter movements are referred to as reactions.
Shift in demand and supply results in reversal of the trend.
The price chart exibit the trend in the price movements.
The technical analysts are able to identify the trend and notice it's reversal immediately on it's occurence.
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