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For Techies: Technical Analysis


If you're a "numbers person," or a heavy-duty computer geek, then you might be interested in a method of picking stocks known as technical analysis. Technical analysis looks at the relationships that exist between a stock's price, its volume (the number of shares that trade hands during a single day), and other factors. By plotting and mathematical analysis, technical analysts hope to be able to predict future changes in the price of a particular stock.

By looking for particular patterns on a price chart of a stock, for instance, technical analysts try to figure out the direction that the stock's price is likely to move in the future. These patterns often have unusual names such as "cup and handle," "head and shoulders," or "double top." If you can identify any of several dozen different established patterns in a stock's price, then you might have a good chance of knowing whether a stock is about to "breakout" (that's technical analysis talk for "rise in price") or "retreat" ("fall in price").

Other information about a stock is often also plotted on a chart along with its price history. A moving average of the stock's price is often included. Each day, the average price of the stock is calculated for the past 90 or 200 days. This moving average is plotted on the chart alongside the price, and can give you an idea of the past trends of stock's price.

Once you've got the basics of technical analysis under your belt, you'll need a couple of things before you start investing -- access to charting software and price data, and plenty of time.

A stock's price chart is the primary tool of technical analysis. There are many technical analysis software programs that you can use if you want to study stocks using these methods. MetaStock, Windows on Wall Street, Omega TradeStation are just a few. You can subscribe to your pick of many services on the Web providing daily price updates that can be imported into these programs.

These programs can be quite expensive, however, so another option might weigh in as the more economical choice for savvy Internet investors. Instead of using a standalone software program, you can take advantage of the free charting programs that are available on the Web.

To use technical analysis successfully, you need to be able to spend time on your portfolio on a regular basis. You need to be able to consistently take the time to analyze charts, and perform the operations necessary to update the indicators you use. And once you've bought a stock, you need to be vigilant in watching that stock's chart in order to know when to sell. There's no time for relaxing if you're a technician.

Opponents of technical analysis point out that there is little likelihood that this method even works. Debate rages about whether it's possible to predict future price movements based on a stock's past performance, or that patterns on a chart are indicative of anything other than pretty designs.