Technical Analysis using Stock Market Trading Software

Technical analysts use Stock Market Trading Software to perform technical analysis or charting as it is also commonly called. These charting tools are very helpful in providing information on momentum, direction, historical relevance and other good information that can go into making a trading decision. For the new trader it is important to note what is meant by technical analysis and how it is different from fundamental analysis, which is another commonly used stock analysis method.

 

Fundamental analysis, as the term suggests, relate to the fundamentals of the company in question. It has to do with its revenues, earnings, stock price in relation to its earnings, the company’s financial and management stability, its market capitalization and other such fundamental data that relate to the company and many times also to the industry that the company is in. Based on fundamental analysis, we can determine whether a stock is attractively priced, evenhandedly priced or it is overpriced. And, we would make the decision to purchase or sell based on that determination.  Fundamental analysis is more of a qualitative analysis of the company and its stock price. More often that not long-term investors perform fundamental analysis and make their investment decisions based on the results of the fundamental analysis. The drawback of fundamental analysis is that it only looks at the companies numbers and does not look at other decimal aspects such as price movement, accumulation, short and long positions, stock price historical performance and other such data related items.

 

That is where technical analysis comes in. Technical analysis uses stock market trading or charting software to plot the historical stock price movement in relation with time. The most basic version of this is what comes up when we click on “charts” from a stock ticker’s main menu. Depending on what level of chart one uses, one can overlay this basic chart with a number of other significant and relevant information that can tell you whether the bulls or the bears are in charge (meaning the stock price is trending downward due to bear pressure or trending upward due to bull activity), the moving averages, the trading volume information, the periodic highs and lows, the resistance and support levels and many other relevant and important factors that enable a technical analyst to make a judgment on which direction and how swiftly the stock price is likely to move in the near term. Hence, this type of analysis is more used by short-term and options traders who typically want to get in and out of the market quickly. The drawback of this method, as one might expect, is that technical analysis does not look at the fundamentals of the company at all. It is not concerned with the company’s performance and financial numbers.

 

Needless to say, as you might have guessed it, neither method used alone is a good way to make trading or investment decisions. One can make a purchase decision looking at the charts only to realize that the company declares terrible results in the next earnings release. Similarly, one can look only at the fundamentals and make a buying decision only to see that the stock price has reached a long-term resistance level and rebounded downward.

 

Moral of the story: Do not only rely on stock market trading software to make your purchase and sell decisions. It always helps to look at the fundamentals too.

Indranil Sengupta has been an investor and trader in stocks, options and FOREX for over 20 years. He has strong experience in technology sector and global markets. He is an editor with TalkFN.com where he discusses trading strategies, real-world trades and trade results. More on the above topic, please go to Trading Contracts in Options.

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