INTRODUCTION TECHNICAL ANALYSIS

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INTRODUCTION TECHNICAL ANALYSIS


An investment in knowledge always pays the best interest (Benjamin Franklin)

Technical analysis is a method of evaluating stocks, forex, commodities or other securities by analyzing the statistics generated by past market activity in order to predict future price movements.

The analysts who do research using technical data is referred to as technical analyst, or also often referred to as a technicalist, technician or chartist. These technicalists do not use economic data to measure the intrinsic value of a stock as fundamentalists do, but use charts that record price movements and the number of transactions (volumes) to identify a pattern of price movements that occurs in the market.

To be more easily understood, fundamentalist differences with the technicalist can be likened to people who are shopping at the mall.
Fundamentalists go to every store in the mall, learn the value of the goods (intrinsic value), then take the decision to buy. While a technicalist sits and looks at the people who go in and shop in the stores, then make a decision based on it without measuring its own intrinsic value.

There are three thoughts that form the basis of technical analysis, namely:

  1. Price movements that occur in the market have represented all other factors (market action discounts everything).
  2. There is a trend pattern in price movements (prices move in trends).
  3. History will be repeated (history repeats itself).

The statement on point number one, “Price movements that occur in the market have represented all other factors (Market action discounts everything)” may be the most important points and become the main basis of thinking in technical analysis. If this point is not understood in depth, then other explanations in the study of technical analysis will become more difficult to understand or accept.

The technicalists believe that everything that can affect stock prices-fundamentally, politically, or otherwise-is psychologically already reflected in the price movements happening in the marketplace. This is because of the Law of Supply & Demand that forms it. From this economic legal basis the technicalists conclude that if the price rises, whatever the reason behind the price increase, demand must outweigh supply and from the fundamental side should be bullish. Conversely, if the price falls, supply must be greater than demand and from the fundamental side should be bearish.

So the charts themselves do not cause prices to rise or fall, but are a reflection of the psychology of the market participants themselves. Charts can be likened to a “photograph.” From a picture photographed in a photograph, we can predict whether the person is healthy or sick, happy or sad, etc. About the psychology that becomes the background of this price movement will be discussed in more detail in subsequent chapters.

Bullish and Bearish are terms used in English for. symbolizes the market situation. Bullish comes from the word: bull. As a feature of a bull that likes to swing its horns up, symbolizes the optimism of the perpetrators in the market conditions that the price is rising. Bearish comes from the word: bear. Like the bear character who likes to swing his claws down, symbolizes the pessimism of the principals in market conditions whose prices are falling.

In Bowling Park, near Wall Street – New York City, there is a giant 3.2-ton bronze bull statue. This statue is presented by an artist named Arturo Di Modica. He made the statue as a gift to the people of New York at the Christmas celebration of 1989, in the hope that the market soon recovered from the massive crashes that occurred two years earlier.

The statue is then known as The Bull of Wall Street or also often called the “Charging Bull”. In 2004 Arturo Di Modica officially announced his desire to sell the statue, but the condition of The Bull of Wall Street or Charging Bull should not be removed from its present place. Anyone interested?

bull wall street

Very often in the early stages of a crucial pattern of price movements or turning points, nobody knows the cause. Usually after the incident, then news agencies are busy looking for information for it. According to my experience and observations, sometimes because I do not know or have not known the cause, the publications shown seem to be just looking for a “scapegoat” or a reason.

For example, one day the US capital market is sharply corrected. The news said the cause was due to rising oil prices. In fact, if observed, the price of oil itself has been in that price range since the last few weeks. The question is “Why it’s just now being used as an excuse? The answer could be” Yes … because the new market is falling now “, or it could be because there is no other better reason.”

Moreover, in early November 2007, the US stock market again experienced a massive sell-off, all the major indexes experienced tremendous pressure. The Dow has fallen more than 4% in just three days, the Nasdaq Index even worse-down 8.3%! The incident by the financial news agency was attributed to a CEO’s comments from a technology company who expressed pessimism about the increase in turnover and profits of his company in the future. It is said to be a result of the economic conditions that it considers to be weakening. The share price of the company itself also fell more than 10% at that time. The question is: “Do you think it would make sense if only based on the comments of a single company CEO alone, could shake the market as a whole and cause such a devastating collapse?”.

It turned out that the beginning of the month was then remembered as the beginning of the recession that hit America, and the crash has not even fully recovered until now. The technicalysts also know that there are reasons or causes behind a price movement, they just do not feel they need to know the “reason” or the cause. The technicalysts argue, more practically and accurately let the market itself tell where the trend is going, and that’s all they need to know.

The market always knows the news before the newspaper do

The statement on point number two, that “There is a pattern of tendencies in price movements” (Prices move in trends), is an adaptation of Newton’s Law of Movement (Newlon’s First Law of Motion). The law is exposed by great scientist Sir Isaac Newton in his paper Philosophiae Naturalis Principia Mathematica towards the end of the 16th century, “A pattern of movements has a tendency to continue rather than not.” In other words, a pattern of movement will continue until there are signs of stopping or reversing, which is the basic principle of trend-follower traders who are “riding” a pattern of trends or trends to generate and maximize profits. So the ability to identify a trend is one of the key factors in technical analysis that we will discuss in more depth.

In the study of technical analysis will also often found a pattern graph (chart patterns) that often occur or repeated over time. Therefore in the third point statement called “History repeats itself”. This is the result and reflection of the psychological and human nature that has remained the same for ever. About Chart Patterns will also be discussed in detail in a special chapter.

chart of ISAT

Shows the pattern of uptrend recorded on the charts of shares of telecommunication company PT. Indosat Tbk (symbol: ISAT) from mid 2006 to mid 2007 on BEJ (Jakarta Stock Exchange). Currently ISAT has also been listing on Wall Street, precisely on the New York Stock Exchange (NYSE).

How to read charts:

  • The horizontal line at the bottom of the charts describes the time period displayed on the charts, or the time line. The more to the right shows the more advanced timing. Seen in figure 1 above, the time period shown is: July 2006 – July 2007.
  • The vertical line to the right of the charts explaining the price is called the price caption line. The upward shows the higher the price. Seen in figure 1 above: Description IDR 4,500, – up to IDR 7,500, – (4.5K to 7.5K display).
  • The zigzag diagonal line in the charts describes the history of stock price movements over time.

how to read charts

The fundamentalist studies the cause of market movementwhile the technician studies the effect.

In short, technical analysis predicts movement of direction by analyzing market action, while fundamental analysis focuses on financial data data to find the true value or intrinsic value of a stock. If the market price is above intrinsic value then it is called “overpriced-the action to be taken is a sell-off, otherwise if the market price is below intrinsic value, it is called undervalued-the action to be taken is the buying action, but the technicalist believes that the effect is all what they need, the reason or the cause is not important.For the fundamentalist, they must always know the reasons and the cause first. Both technical analysis and fundamental analysis both have the same goal, that is predicting the direction of the market, it’s just that their approach method is different.
Although some people claim to be a technician or fundamentalist, in fact, those who have invested heavily in paper assets usually have little knowledge of both. It’s just that there is more to the technical or fundamental. It is difficult to say which one is better, but in general the technical analysis has more impact for traders with shorter timeframes, while fundamental analysis is used by investors with longer term views.

For example, for example a short-term trader who does not maintain his “position” more than a few days, it would be difficult to make a decision based on fundamental analysis. In this timeframe they are certainly more focused on technical analysis, because the approach in this way more concise. Conversely for a long-term investor who, for example, wants to regularly or regularly collect a number of shares in his portfolio for retirement later, the fundamental analysis would be more helpful.

 

 

 

 

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