ROLE OF TECHNICAL ANALYSIS: AS A TOOL FOR TRADING
DECISIONS
What is Technical Analysis?
We can define Technical Analysis as a study of the stock market considering factors
related to the supply and demand of stocks. Technical Analysis doesn’t look at underlying
earnings potential of a company while evaluating stocks {unlike fundamental Analysis}.
It uses charts and computer programs to study the stock’s trading volume and price
movements in the hope of identifying a trend. In fact the decision made on the basis of
technical analysis is done only after inferring a trend and judging the future movement of
the stock on the basis of the trend. Technical Analysis assumes that the market is efficient
and the price has already taken into consideration the other factors related to the company
and the industry. It is because of this assumption that many think technical analysis is a
tool, which is effective for short-term investing.
History of Technical Analysis:
Technical Analysis as a tool of investment for the average investor thrived in the late
nineteenth century when Charles Dow, then editor of the Wall Street Journal, proposed
the Dow theory. He recognized that the movement is caused by the action/reaction of the
people dealing in stocks rather than the news in itself.
Walter Deemer was one of the technical analysts of that time. He started at Merrill Lynch
in New York as a member of Bob Farrell's department. Then when the legendary Gerry
Tsai moved from Fidelity to found the Manhattan Fund in 1966, Deemer joined him. Tsai
used to consult him before every major block trade, at the start of a time when large
volume institutional trading became the norm and the meal ticket for brokers. Deemer,
could recrea ...