Importance of Technical Analysis in Investment

Broadly, there are two types of investors. The first group goes by their guts and sixth sense. They generally do not look at charts. Even if they look they are not influenced by charts and analyzes. The second group swears by technical analyzes. They will only invest when a certain market pattern or trajectory is…

Broadly, there are two types of investors. The first group goes by their guts and sixth sense. They generally do not look at charts. Even if they look they are not influenced by charts and analyzes. The second group swears by technical analyzes. They will only invest when a certain market pattern or trajectory is played out. As in any other situation, the correct approach lies somewhere in between these two extremitudes.

Most organizations do not face extraordinary market or business situations regularly. Some examples of these situations in a manufacturing industry are – drastic increase in raw material or input cost, sudden fall in demand, labor unrest, loss of critical manpower, fire or flood or natural calamity, legal or regulatory issues and negative public reporting or similar . These are also called 'fundamental events' in market terminology. During such kind of events technical analyzes is not a tool to rely on. That everyone will agree.

But we have to understand that in an overall market scenario, 'fundamental events' do not happen during 80% of the time. And in this period technical analyzes can be relied upon. Not only that, it is a very brutal tool in hand for market predictions. Many people feel that technical analysis is purely statistics. That is not true. Fundamental analysis helps in gauging the demand supply situation, price earnings ratios, economic statistics and so forth. There is no room for psychological factors in such analyzes. Technical analysts, however, analyzes the historical trend of price and volumes. Since it is analyzing the market data, the non-numerical sentiments of the market are also accounted for.

Volume is one of the most important technical analysis tools. This is generally applied to price movements. Volume tracks the overall activity of a certain stock or commodity in the trading market. This includes buying, selling and futures contract. Let us take the example of gold prices which is fluctuating heavily these days. If we see that gold price has dropped and this has claimed in a spike in volume – we can conclude that this is a healthy price correction. However, if after the price correction the volume falls then we will conclude that the price movement had no strength.

Price correction in any financial trading market is a tricky decision. This is because it has the power to erode wealth and can seriously impact loss and gain. Even if the loss is not direct, uninformed price correction can result in loss of opportunity.