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Module 6 Assignment Security Analaysis

Technical analysis differs from fundamental analysis in that technical analysis looks at past price movements to predict future prices, while fundamental analysis examines underlying economic and financial factors that influence a business. The major assumptions of technical analysis are that the market discounts all known information, prices move in trends and countertrends, and price patterns are repetitive. The key difference between technical analysis and the efficient market hypothesis is that technical analysis believes predictable patterns exist in stock prices, while the efficient market hypothesis says stock prices immediately reflect all known information. While fundamental analysis is better for long-term investments, technical analysis is more useful for short-term trading due to its focus on recent price data. Some challenges to technical analysis include the subjectivity of interpreting price patterns

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Cindy E. Ramos
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44 views

Module 6 Assignment Security Analaysis

Technical analysis differs from fundamental analysis in that technical analysis looks at past price movements to predict future prices, while fundamental analysis examines underlying economic and financial factors that influence a business. The major assumptions of technical analysis are that the market discounts all known information, prices move in trends and countertrends, and price patterns are repetitive. The key difference between technical analysis and the efficient market hypothesis is that technical analysis believes predictable patterns exist in stock prices, while the efficient market hypothesis says stock prices immediately reflect all known information. While fundamental analysis is better for long-term investments, technical analysis is more useful for short-term trading due to its focus on recent price data. Some challenges to technical analysis include the subjectivity of interpreting price patterns

Uploaded by

Cindy E. Ramos
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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New Era University

COLLEGE OF BUSINESS ADMINISTRATION


No. 9 Central Avenue, New Era, Quezon City

Name: Karlo A. Beloya


Section: 3FM-2
Course: BSBA major in Financial Management
Subject: Security Analysis

1. How does technical analysis differ from fundamental analysis?

Technical analysis looks at the price movement of a security and uses this
data to attempt to predict future price movements. Fundamental analysis
instead looks at economic and financial factors that influence a business.

2. What are the underlying assumptions of technical analysis?

Technical analysis has three main principles and assumptions:


(1) The market discounts everything,
(2) prices move in trends and countertrends, and
(3) price action is repetitive, with certain patterns reoccurring.

3. What major assumption causes a difference between technical


analysis and the efficient market hypothesis?

The efficient market hypothesis holds that when new information comes
into the market, it is immediately reflected in stock prices; neither technical
analysis (the study of past stock prices in an attempt to predict future
prices) nor fundamental analysis (the study of financial information) can
help an investor generate returns greater than those of a portfolio of
randomly selected stocks. The author reviews the recent findings of three
schools of thought that challenge the efficient market hypothesis based on
their claims that evidence of predictable patterns in stock prices exists.
New Era University
COLLEGE OF BUSINESS ADMINISTRATION
No. 9 Central Avenue, New Era, Quezon City

4. What are the major advantages of technical analysis compared to


fundamental analysis?

Fundamental analysis is most useful for long term investments, while


technical analysis is more useful for short term trading and market timing.
Both can also be combined to plan and execute investments over the
medium and long term.

5. What are the major challenges to technical analysis and its rules?

1. Drawing of Price Action Patterns


Price action in technical analysis refers to movement in stock prices and getting
trading cues from it.
Interpreting price action is very subjective and also one of the common problems
in technical analysis. It’s common for two traders to arrive at different conclusions
when analyzing the same price action. One may observe a bearish pulldown and
another may think it shows a possible turnaround soon. As a result, many traders
would be better off using price action as just one part of a larger strategy.

Hence, rules can’t be written in stone, but with a methodical study, certain
guidelines may be:
▪ Create support and resistance zones
Investors miss out several opportunities following only price levels.
Horizontal, single lines lose significance in live trading, even though they
looked sufficient in hindsight.
▪ Study Highs and Lows
Analyzing the market highs and market lows give better insight on trend
direction, gives hints about price reversals and signifies market strength.
▪ Notice the Price Levels
More often than not, investors act on price action signals at insignificant
and unimportant price levels, which makes for an unsuccessful trade.
Signals at strong support and resistance zones make for a good trade.
New Era University
COLLEGE OF BUSINESS ADMINISTRATION
No. 9 Central Avenue, New Era, Quezon City

2. Be clear which patterns you trade


There are a number of patterns in technical analysis that are indicative of market
behavior. It’s important to know which patterns you trade. There are a number of
characteristics in a pattern so we must not jump to conclusions before analysis
whether the pattern is good or bad. Otherwise, it can become one of the
problems in technical analysis.
In a world as dynamic as that of trading, being conclusive without study and deep
examination might tend to be an error of huge magnitude, thus categorizing
trading patterns into good and bad, or white and black is ill-advised, as analysis
of patterns is more about shining grey.

3. Know which tools and indicators you use and don’t jump around
Indicators are statistical tools under technical analysis that gives buy-or-sell
signals to investors. They help in ascertaining the momentum, market trends,
level of volatility, and other aspects of a security. Only when they are collectively
used with other technical analysis tools do they give successful returns.
There are a number of indicators that help investors make trading decisions.
Some are – Stochastic, Relative Strength Index (RSI), and Moving Average
Convergence Divergence (MACD). Now, how they function and help is
something that either one knows or one learns. How to use them is something
that is very essential for technical analysis.

4. Avoid Hindsight Error


More often than not, fundamental data, charts, and indicators give us data that get
mixed in our heads and paints a different picture of the present scenario. Investors,
then, take actions according to what they think will happen. But in retrospection,
they look at outcomes in the market with a ‘know-it-all’ attitude. They pretend like
they ‘had a feeling’ that this would happen long before. Everything seems obvious
to them in hindsight. This gives them a false sense of confidence.

5. It’s a myth that entries are most important


People are often mistaken that if they make the perfect entry, they’re set on the
road to profitability. They often use new technical analysis tools or mess with their
old ways to do so. Well, they’re wrong. Where you make your entry has almost
nothing to do with your success or failure.
New Era University
COLLEGE OF BUSINESS ADMINISTRATION
No. 9 Central Avenue, New Era, Quezon City

6. Imperfections in Price Patterns


Price, being a dynamic concept, can’t be 100% reliable. There will be certain
‘imperfect’ price actions that will not conform to your textbook ideas and rules in.
Don’t try to force these patterns on the market. Everyone reads the same textbook,
and some still fail. It’s very rare that people find these patterns in reality. We end
up having unreal expectations, false assumptions, and unsuccessful trades.

7. Technical analysis is very discretionary


There are many technical analysis patterns and indicators today, but it is not
possible that we should master all the patterns and indicator. We should only trade
with the indicators and patterns with which we are comfortable. Using too many
indicators will confuse up and it will lead us to take up a wrong decision. But we
should not ignore the other indicators also. We may not use them but we should
keep knowledge about them. We can need the help of those indicators while
trading.

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