Technical Analysis of Market Trends - dummies

By David Stevenson

Markets, in the UK and around the world, sometimes move like a swarm or herd, pushing prices up or down based on a trend. This insight has spawned a huge amount of interest in what’s called technical analysis, involving carefully studying lots of charts and graphics to work out what the market trend or the price of your share is telling you.

Trends are hugely important in the investment world. These great ebbs and flows in sentiment are quantifiable and so can be summed up clearly and easily in simple lines on a chart, using the constantly changing share price (or bond price, for that matter) as the basis of measurement.

There are a few popular tools for spotting and measuring trends. Note that the standard setting for most of these technical analysis software packages is 14-day-long periods, but shorter ones are also popular.

Constantly staring at a price chart probably wouldn’t mean very much if financial assets (shares, bonds) changed randomly every day, with no predictability. But that isn’t true. Even academic economists who rave about supposedly efficient markets accept that for some, if not most, of the time, markets move in broad trends that can last for a long time.

You can apply all these technical measures not only to individual shares but also to whole markets, as measured by an index such as the S&P 500 or FTSE 100. Simply call up the index chart (you can usually buy the index through an exchange-traded fund) and then put the technical measure to work.

Variability in the price of risky assets goes with the territory and since time immemorial shares and stocks have increased and decreased by substantial margins. Technical analysis simply puts that variance under the microscope, giving it shape and showing exactly how a market or share price is moving compared to its peers.