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Security Analysis and Portfolio Management




                    Notes              Discuss charting techniques
                                       Explain technical indicators

                                   Introduction

                                   The methods used to analyze securities and make investment decisions fall into two very broad
                                   categories:  fundamental  analysis  and  technical analysis.  Fundamental  analysis  involves
                                   analyzing the characteristics of a  company in order to  estimate its value. Technical analysis
                                   takes a completely different approach; it doesn't care one bit about the 'value' of a company or
                                   a commodity. Technicians (sometimes called chartists) are only interested in the price movements
                                   in the market.
                                   The term technical analysis is used to mean fairly wide range of techniques, all based on the
                                   concept that past information on prices and  trading volume of stocks  give the enlightened
                                   investor a picture of what lies ahead. It attempts to explain and forecast changes in security
                                   prices by studying only the market data rather than information about a company or its prospects
                                   as is done by fundamental analyst. John Magee, whose book Technical Analysis of Stock Trends
                                   is considered a classic for technical analysts, says:
                                   "The technician has elected to study, not the mass of fundamentals, but certain abstractions,
                                   namely  the  market  data  alone.  But  this  technical  view  provides  a  simplified and  more
                                   comprehensible picture of what is  happening to  the price of a stock. It  is like  a shadow or
                                   reflection in which can be seen the broad outline of the whole situation. Furthermore, it works."
                                   The technical analysts believe that the price of a stock depends on supply and demand in the
                                   marketplace and has little relationship to value, if any such concept even exits. Price is governed
                                   by basic economic and psychological inputs so numerous and complex that no individual can
                                   hope to understand and measure them correctly. The technician thinks that the only important
                                   information to work from is the picture given by price and volume statistics.
                                   The  technician sees the market,  disregarding minor  changes, moving  in discernible trends,
                                   which continue for significant periods. A  trend is believed to continue until there is definite
                                   information of a change. The past performance of a stock can then be harnessed to predict the
                                   future. The direction of price change is as important as the relative size of the change. With his
                                   various tools, the technician attempts to correctly catch changes in trend and take advantage of
                                   them.

                                   6.1 What is Technical Analysis?

                                   Technical analysis is a method of evaluating securities by analyzing the statistics generated by
                                   market activity, such as past prices and volume. Technical analysts do not attempt to measure a
                                   security's intrinsic value, but instead use charts and other tools to identify patterns that  can
                                   suggest future activity.
                                   Just as there are many investment styles on the fundamental side, there are also many different
                                   types of technical traders. Some  rely on chart patterns, others use  technical indicators and
                                   oscillators, and most use some combination of the two. In any case, technical analysts' exclusive
                                   use  of historical  price  and  volume data  is  what  separates them  from their  fundamental
                                   counterparts.  Unlike fundamental  analysts, technical analysts don't  care whether a stock is
                                   undervalued - the only thing that matters is a security's past trading data and what information
                                   this data can provide about where the security might move in the future.






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