What is Technical Chart Analysis? How does it differ from Fundamental Analysis, and why should every trader learn how to use technical chart analysis?
One simple comparison that I’ve seen recently explaining the difference between Technical Chart Analysis and Fundamental Analysis involves shopping. In a shopping mall, everyone that goes into a store to look at the product, talk with the management, gets to know who owns and operates the store, ask questions and gets answers about the cash flow, and profit and loss of the store, is doing fundamental analysis. But the person who doesn’t go into the store, but only sits on a mall bench and watches the flow of people into, and out of the store, is doing simple technical analysis.
The guy sitting on the bench is just looking for visual indicators telling him if the store is selling product, or not. If he sees a flow of people leaving the store, smiling, with the stores product in their hands, the store sales are probably going well. If he sees a lot of people coming back to the store returning the product, that traffic tells him the store isn’t doing so well, and is probably losing money.
Basically, I don’t really care about what the store is selling. I only care about the statistical indicators and algorithms that suggest which direction that stores’ equity share price is headed.
Every Picture Tells a Story
Another way to describe Technical Chart Analysis is Every Picture Tells a Story. In the case of equities, and commodities, and pretty much anything of value that can be charted, that investments’ chart is its’ picture. How that picture is painted can differ based on the technical tools used to paint the chart with, and how the technical analyst interprets what that charts picture is telling them. Tools I like to use are Bollinger bands, Stochastics, MACD (Moving Average Convergence Divergence), the Relative Strength Index, Volume indicators, and my favorite, Fibonacci retracement levels. These technical indicators are useful in identifying levels of support and resistance, and directional changes in an equities share price. For the technical chart analyst, every picture tells a story, and every chart is worth a thousand words, or more.