What are the different principles or methods of technical analysis?
Technical stock market analysis is the quantitative or statistical approach to tracking and predicting stock price movements. It is based on the conviction that past performance is the only accurate way to predict future direction. Technical analysis is the opposite view to the qualitative approach that assesses things like management pedigree or the vision and values of the company leadership.
Technical analysts would admit that markets as a whole and individual stocks are subject to pressure from psychological forces but the indices and individual stock prices react in a predictable correlated way. Thus if you analyze the numbers and ratios you can buy low (sell high) in the confident expectation of a price appreciation (depreciation).
Here are the five commonest technical analysis principles used to predict share price movement.
1. Resistance level; this is the upper price beyond which a stock will not go. When a stock price reaches this resistance price according to the technical analyst it time to sell because the only way is down.
2. Support level; this is the lower price beyond which a stock price will not fall. When a stock price wave bounces to this bottom price, according to the technical analyst it is time to buy because the only way is up.
3. Breakout; this is when according to technical analysts the stock price goes significantly beyond either the resistance or the support levels.
4. Advance-Decline Line; the sum of all of the advancing issues -batches of stocks- take away the sum of all declining issues, added to a cumulative total. This is a technical analysis of the market as a whole.
5. Moving average; this is a measure of trends in any particular stock or market sector price. It involves noting the price at a given number of moments in time say 10 times and then calculating the mean or average price. Plot these averages on a graph to give a moving average and visible trend. Clearly the aim would be to isolate the low turning point in a trend and make a successful buy. Depending upon the time interval of the prices the technical analyst can derive a daily, weekly monthly or even an annual trend.
Of course the flaw in all technical analysis is its basic assumption that past performance predicts the future performance. All the metric in the World can only measure what has gone past and there is no technical analysis of the future. It is all just probabilities and chance.