How to Use Technical Analysis and Other Stock Market Analysis
A vital part of learning about the stock market
is to discover how to use stock analysis to work out if a
share is good value.
I suppose the first thing we need to
consider if we're going to invest in the stock market is:
Which share, or shares, should I invest
in? And how do I know if I'm getting that share at a good
One way to decide is to rely on the advice
But I do NOT recommend it!
Do yourself a favour and develop the ability
to analyse the market yourself, and make your own
decisions rather than rely on tips. The
tip may well have come from a source with a hidden agenda.
Sometime false rumours and misinformation are deliberately
spread to create demand for shares that someone else wants
If you do your own research and make
your own decisions, you can be sure you're dealing
with facts not hearsay.
So how do we do our own analysis?
There are two main methods: Fundamental
Analysis and Technical Analysis
What is Fundamental Analysis?
Realise that when you're buying shares, you
are investing in a business. Now if you're going to
invest your hard-earned into a business, aren't you going
to want to know something about it's prospects of success?
- What's the company's financial position?
- Does the management have a good track record?
- How much market share do the company's products have?
and so on.
Finding the answers to these kind of questions
is what's called Fundamental Analysis
we look at the fundamentals of the company's situation
rather than what's happening to its share price on a day-to-day
Fundamental analysis is all about what the company
does, and whether it is profitable. It takes into account
the state of the economy, the company's balance sheet and
its prospects for the future.
research page on the Web site of the Australian Stock
Fundamental analysis can be a lot of work
be prepared to trawl through company annual reports, follow
the financial press and keep up with ASX announcements.
Usually a full service stockbroker
can help with fundamental information.
Personally, I think it's important for beginners
in the share market to keep things simple. Stick with
blue chip companies when learning to invest
the larger, well-established companies. Don't make
things complicated for the sake of it.
Fortunately, there is another form of
analysis that I find much easier to come to grips with
How about Technical Analysis?
Technical analysis takes an almost opposite
approach to that of fundamental analysis. It disregards
fundamental factors entirely and focusses on just one
What has the company's share price been doing
In technical analysis we chart
the changes in the company's share price over time. This
visual picture makes it easy to identify patterns
in the behaviour of the price. These patterns then suggest
the likely future direction of the price which
at the end of the day, is all we really care about.
Now focussing only on changes in the share price
may seem to be dangerously oversimplifying the process of
analysing a share. But is it really?
Sure share prices are affected my fundamental
factors, international markets, economic events, company
news, interest rates, rumours, market sentiment
these things have an effect. But when all is said and done,
the question of whether the share price will rise of fall
depends upon just one thing: Are buyers more enthusiastic
than sellers, or vice versa?
If buyers are more enthusiastic, the
price will rise. If sellers are more enthusiastic,
the price will fall.
Technical analysis assumes that all these many
factors, including company fundamentals, just influence the
relative enthusiasm of buyers and sellers and are
automatically reflected in the price chart.
It boils down to this: a company's share price
really has nothing to do with fundamental factors,
but with the buyers and sellers perceptions.
The market is driven by fear and greed.
Fear of loss, and hope of gain. When fear dominates,
prices fall. When greed dominates, prices rise.
The Trend is Your Friend
This is why prices move in trends.
Take this chart of BHP. Although the price jumps
up and down in the short term, we can discern definite underlying
trends that go on for months. When the overall market
perception of this stock is negative, the trend is
down and that down trend will persist until
this market perception changes. Likewise for an up
trend it will remain in effect as long as market perception
remains positive, despite short term ups and downs.
So our goal then if we want the price
of our stocks to rise over time is to only buy
shares that are in an up trend.
You can already see how charting the share price
gives us valuable information. If this were the current chart
for BHP, do you think now would be a good time to buy? Hell,
no! The chart suggests that a new down trend has begun.
Only buy shares in up trends
So the first step in the technical analysis
of a share is to work out: Is it in an up trend, or a
downtrend (or the third possibility, NO trend just
To work this out we need an up-to-date chart
of the price.
We can get basic charts for free off the Internet,
for example from Yahoo!
How to get free share charts from Yahoo!
Here's a chart of Santos Ltd that I made with
my commercial share charting software
We can see that Santos was in a down trend until
February and is now in an up trend.
And here's the same chart from the
Yahoo! Web site
||Click on the picture above
to see a short movie showing you exactly how
I created this chart in under two minutes using Yahoo!
The next step in learning to technically analyse
a share chart is to learn something about indicators.
Indicators are mathematical manipulations of the share price
data that are drawn on the chart. They may reveal patterns
in the price activity that aren't immediately obvious from
looking at the raw price data.
An example should make this clearer
One of the most common technical indicators
is called a moving average. It's a line on the chart
created by averaging the price of the share over a certain
period of time. The effect of the averaging is to smooth
out small fluctuations in the price, making the main trends
easier to see.
Here's a chart of Woodside Petroleum Limited
(WPL) with a moving average applied. The blue line
is the raw price data the day-to-day price
of WPL shares. The red line is an average of
these day-to-day prices over the past 100 days. In other
words, every point on the red line marks the average price
of WPL shares over the previous 100 days. We would call this
a 100 day moving average.
What's the point?
Well, apart from smoothing out small fluctuations,
the position of the average with respect to the price
helps to make the main trends easier to spot. Notice that
when the share price is in a down trend, the blue
line is below the red. When the share price is in
an up trend, the blue line crosses above the
If we were to buy and hold this share only
when the blue line was above the red, and sell when
the blue line crosses below the red, we would effectively
filter out the down trends. That way we would only
be holding the share when it's going up in value.
If we expand the WPL chart out to the past five
years, you can see we would have bought the share near it's
lowest price, and sold it near it's five-year high.
||Click on the chart above
for a short movie showing how these charts with moving
averages were created.
Before investing in a share, you may want to
check whether or not it's trading above the 100 day moving
Advice on Starting Out
It's a good idea to try paper trading
for a while before plunging into the market with your newly
acquired share analysis skills.
Paper trading means monitoring a dummy
portfolio for a period of, say, six months to test how successful
your investing strategy is going to be.
In the meantime you can be saving more money
to invest, while gaining confidence and learning more about
technical analysis and other stock market analysis
Trading Learn to Trade Short-Term to Boost Your
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