Technical Analysis: A Tool for Stock Price Movement Prediction

Running head: TECHNICAL ANALYSIS
Technical Analysis
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1TECHNICAL ANALYSIS
“Technical analysis, the prediction of price movements based on past price
movements, has been shown to generate statistically significant profits despite
its incompatibility with most economists’ notions of efficient markets”.
Introduction
Technical Analysis is based on the application of software application that allows the
usage of the past data prices and incorporates the same for the purpose of the analysis of the
stock price movements. Several Indicators and Patterns is the common tool and approach that
is used for the classification and identification of the various trends in the stock market (El-
Ansary and Mohssen 2017). There are wide variety of charts and tools that are applied by
analysts and experts for forecasting and assessing the trend movement in the share price of
companies and indexes (Chen, Zhou and Dai 2015). It is used widely used and applicable for
commodities, stocks, indices, futures and other tradable instrument where the price data of
the financial instrument is available and the same is influenced with the help of the demand
and supply created in the overall markets.
Fundamental Analysis on the other hand deals with analysing the company based on
the financial statements of the company, financial performance and the future outlook of the
company under which the operations of the company is based. Where technical analysis
includes charts and market forces (demand and supply), fundamental analysis includes ratios,
financial statements, news and outlook for the company.
Efficient Market Hypothesis
Efficient Market Hypothesis says that the share price today reflected in the market is
full potential share price whereby informational efficiency occurs in the capital market. This
means that the predictions, expectations and historical prices movements are already

2TECHNICAL ANALYSIS
incorporated in the form of current share price of the company (Jiang, Tong and Song 2017).
A Key assumption made by the EMH is that it is not possible to beat the market and earn
abnormal profits in the market. The EMH defines the market structure into three broad
perspective as Strong Form EMH, Semi-Strong EMH and Weak Form EMH.
In accordance with the Efficient Market Hypothesis it is to be noted that in case of
Strong Form EMH nothing can be done to earn profit as all the forecast, predictions and
information’s are already incorporated in the share price of the company. In case of Semi-
Strong EMH insider information can allow the investors ear abnormal profits. In case of
weak form efficiency past prices data can be used for predicting the value of the stocks.
Technical Analysis can be used for identifying the trends and patterns followed by the share
price, but on the other hand it is also important to consider the consistency of price data.
Role of Historical Data
The only crux between the two common forms discussed, which the EMH is and
technical analysis is the application of the historical data for the purpose of the analysis. It is
often argued and said that patterns and charts followed by an asset or security in the past is of
great importance (Ye et al. 2016). However, identification of these patterns and charts are the
crucial steps in technical analysis which helps the investors in identifying the trend that is
followed which then becomes easier for the purpose of trading. For earning above average
market return it is necessary for the investors and analysts to identify and analyse the correct
data at correct time for successfully executing a trade.
Stationary in the historical data is of key importance which should prevail for the
purpose of trading and analysis. Stationary Process in Statistics and data analysis is a
stochastic process where the mean & variance of the data do not change consequently over a
period of time it is stable over the trend period (Edwards, Magee and Bassetti 2018).

3TECHNICAL ANALYSIS
Role of Technical Analysis
There are various techniques and strategy applied for the purpose of the analysis of
the stock prices of the company and the same should be taken into consideration for the
purpose of the analysis. The process of technical analysis is to carry out price forecasting for
the assets or index thereby anticipating the price level of the shares (Cervelló-Royo, Guijarro
and Michniuk 2015). Price and Volume charts and the movement in the same are some of the
key tools that are used in the forecasting of share prices. Sound Investment decision can be
better made when the trading decision is based on multiple factors and approaches and when
the validity of the trading decisions or strategy is already made. Obviously, it is to be noted
that technical analysis cannot really allow the movement or the prediction of the share prices
of the company but it can instead help the investors or the analyst predict the price movement
of the share price of the company (Nazário et al. 2017).
Combination of the price data of the company or the asset thereby combining the
various aspects of the technical aspects of the stocks like the open price, close price, high
price and low price and the volume of that particular data are taken into consideration for the
purpose of analysis. Timeframe of trading and trading strategy is the key factor while doing
the analysis it is important to define the term period of investment so that strategy and trading
could be done in accordance with the same (Nguyen and Shirai 2015). The timeframe of
investing could be intraday (1 Minute, 5 Minute, 30 Minute or so which is depended on the
trading strategy and the opinion about the stock or asset. Technical Analysis has always given
proven results and better trading results as the same is based on the analysis of the software’s
and other key technical assumption that allows the investors or the analyst identify and
execute a trade accordingly (Arthur 2018). In case of efficient market common technical
analysis tool application such as resistance and support level is done for identification of the
trends and prediction of the share price movement. If the share price falls below the