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Technical Analysis

Just to put any doubts to rest, let me make it clear that the art and science of technical analysis is an intricate and lengthy one. It could easily overshadow the length and complexity of fundamental analysis. The laws of statistics and trends are heavily employed in technical analysis, and many of these seem esoteric to the average investor. Here we will try to cover a few simple aspects of technical analysis in order to establish some basic knowledge of it. I invite the interested reader to dig deeper into this area by studying the many books and articles that have been published on this subject. But let me warn you (without disparaging) that a profound study of technical analysis could get very dry and very complicated very fast.

Let’s start this discussion with the roulette table, such as is used in casinos for players to wager on. Perhaps the simplest form of gambling in a casino is betting on red or black on a roulette table. If you have ever been at a roulette table and have observed that the color black has come up six times in a row, chances are that if you were to make a wager, you would pick the color red. In doing so you would have unwittingly engaged in a little technical analysis of your own. Whether or not the color red turns out to be the landing box of the spinning ball on the seventh spin is immaterial in this analysis. Statistically, however, you would be correct in picking the color red for your wager. You may be surprised to know that the complex science of statistics has its roots in gambling.

Now a wise investment in a company’s stock may not be as risky as gambling at roulette, but technical analysis is very much a statistical and trend analysis. Unlike fundamental analysis, which is a gauge for a company’s health and financial strength, technical analysis considers the past performance of a stock in an attempt to discover a trend or …