This issue features an in-depth examination of Web-based technical analysis services by Wayne Thorp. Technical analysis covers a variety of techniques that study relationships between a stock’s past price and volume movements and patterns to forecast security and market price direction. Typically, these patterns are charted. Technical analysis is well-suited to computerization; it involves the manipulation of a large amount of data. Technical analysis software allows investors to quickly obtain data and plot it, applying various technical indicators such as moving averages. The better systems also allow investors to test the success of various strategies on historical data (backtesting). What once would have taken many hours, if not days, can now be accomplished in minutes.
In contrast, fundamental analysis refers to the process of selecting stocks based upon underlying economic trends and long-term expectations of future company performance. Fundamental analysis revolves around projecting growth in factors such as sales, cash flow, earnings and dividends.
About half of our members use computerized technical analysis systems. Many use a fundamental screening system to identify interesting prospects and then look at a technical chart to help determine entry and exit points for their investments.
Even long-term investors can benefit from awareness of the factors influencing the stocks they own. A chart can quickly highlight a sudden jump in volume for a stock, which may warrant some further investigation. Successful use of technical analysis follows the same basic principles as other types of investing. Before proceeding, you must be fully educated in the forces that drive security prices. Short-term prices tend to be driven more by basic market supply and demand laws, while long-term prices tend to be driven more by the intrinsic value of the underlying investment.
If you plan to trade, a disciplined trading system must be constructed, tested, and actually followed. This system must match up with your risk tolerance and investment philosophy as well as match up with the security type and trading timeframe. Mistakes must be quickly acknowledged and reversed.
Many of the technical sites offer real-time data feeds. Your need for this type of data is dictated by your investment horizon. The longer your horizon, the less important it is to have access to real-time or even intraday data.
Overall, a good system is one that matches your investment philosophy and supplies the kind of information you need to make educated investment decisions.