How is the technical analysis of stocks in the context of the stock market structured?

Technical stock analysis, also known as chart analysis, goes back to Charles Dow, who founded it in the late nineteenth century. Their central goal is to derive forecasts of the future price development of securities from the historical price and sales figures. Dow was convinced that financial markets would follow cyclic movements and be subject to certain patterns,Perspective that was later continued by Ralph Nelson Elliott with the development of the Elliott wave theory. However, the broad application of chart analysis only began with the advent of computer technology in the 1980s, when more and more investors were gaining access to powerful analysis tools.

Comparison of fundamental analysis and chart analysis

In contrast to technical analysis, the fundamental analysis is in which securities are evaluated based on business indicators and the economic environment. While the chart analysis assumes that all relevant information is already included in the course, the fundamental analysis considers the economic basis of a company. These twoApproaches reflect different perspectives on the functioning of the markets and are often controversially discussed.

Market efficiency and scientific controversy

Technical analysis is based on the assumption that markets are not completely efficient. In the scientific literature, therefore, the effectiveness of technical analysis methods is intensively debated. Studies on this topic come to different conclusions: while older studies often show positive results, newer works are often more critical and showmethodological problems such as data snooping or data dredging. When searching for patterns in time series, there is a risk of discovering random connections that have no actual meaningfulness. It is therefore important to check hypotheses with different data sets, which in practice is rarely implemented consistently.

Data analysis challenges

Another problem arises from the fact that there is usually only one historical time series, the emergence of which is subject to an unknown random process. If different periods of time, such as a company’s share prices in different decades, are considered separately, additional difficulties arise because the framework conditions change. Especially inHigh-frequency trading shows that trading activities are not evenly distributed over time. Software developers often integrate round numbers into their programs, resulting in abundance of transactions at specific intervals. Trading models also often work with clearly defined price marks, which are specified by programmers.

The combination of technical and fundamental analysis

Combinations of technical and fundamental analysis are particularly interesting. If, for example, an undervaluation is determined using fundamental data and technical indicators signal a trend channel, this can indicate a so-called “value event”. In such cases, other market participants also recognize the undervaluation and react accordingly. institutionalInvestors usually perform more analyzes in their transactions than private investors. Their trading behavior, often referred to as “smart money”, has a particularly strong impact on the markets as they move large volumes and often place their orders in the closing auction.

Institutional Investor Strategies and Market Influence

Big market participants try to disguise their orders by dividing them into many smaller orders to avoid negative price effects like “slippage”. With so-called Iceberg Orders, only a small part of the total order is visible in the order book. Once a partial order is executed, the next portion is automatically added. Although there are technical indicators thatTaking into account trading volumes, standard tools usually do not succeed in reliably identifying such hidden orders.

The importance of chart presentation

Another phenomenon of chart analysis concerns the presentation of the course history. Almost all private investors use linear charts where the distances on the vertical price scale are constant. Logarithmic charts, on the other hand, reduce the gaps with increasing price levels and offer a more realistic assessment of performance over longer periods of time. Because websites mostly linearShow charts, a distorted picture of the actual performance is often created for private investors. Once the excess return has been achieved, interest is paid with the underlying, which means that the gap between active and passive management seems to open up more and more. In order to be able to correctly assess management services, it should therefore be preferred to work with logarithmic charts.