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Navigating through traffic jams and unsatisfactory road conditions, coupled with a handful of defiant drivers who pay no heed to rules and road bullies, has positioned Malaysia at the 8th spot of the most stressed-out nations when it comes to driving. As we tackle the traffic gridlock, particularly in the bustling heart of Kuala Lumpur and the major cities, we often catch wind of the radio catchphrase, "It's okay if you're not good-looking, as long as you're rich." This catchphrase has become a nationwide phenomenon, echoing across Malaysia. Many who listen to it start to dream of generating extra income through involvement in the stock market.
Those stepping into the world of stock trading for the first time, usually lack the knowledge and understanding of the intricacies of the stock market. Investing and trading stocks isn't about shooting in the dark or turning a blind eye. It involves techniques that delve into stock analysis. Here, stock analysis refers to the methods used by investors and traders to evaluate and investigate trading instruments, investment sectors, or specific stock markets as a whole. Stock analysis is also known as equity analysis or market analysis. Investors or traders make decisions based on the findings obtained through these techniques.
Stock analysis serves as a guiding light for investors and traders, shedding light on the economic landscape, the current state of the stock market, and the sentiments of both investors and traders. It entails delving into the historical and present market data, with the aim of formulating methodologies or approaches for selecting stocks that are suitable for investment or trading. Stock analysis also aids in identifying the right time to trade (buy and sell) stocks.
The world of stock analysis is divided into two schools of thought: fundamental analysis and technical analysis. Investors and traders adopt different techniques, either relying on one approach or combining elements from both.
Technical analysis, as defined, refers to the method of evaluating securities by analyzing statistics and data generated by stock market activities, such as past prices and trading volumes in units (volume). Technical analysis attempts to predict price changes by identifying trends or patterns in market prices, and trading volumes and is assisted by technical indicators. Technical analysts, unlike fundamental analysts who seek to assess a stock's true value, use stock price graphs bolstered by technical indicators to identify trends that can predict future trading activities for the analyzed stock (price movement in the future).
The roots of technical analysis date back to Charles Henry Dow and his Dow Theory, which he collected and documented through his writings, along with the help of securities market researchers like William P. Hamilton, Robert Rhea, and others. Over time, technical analysis has evolved, resulting in hundreds of price movement trends and technical indicators developed through years of research.
To grasp the essence of technical analysis, aspiring traders need to understand its fundamental assumptions:
- The market takes everything into account.
- Prices move in trends or patterns.
- History tends to repeat itself.
The market, like an astute observer, considers everything – from the past, and present, to the future. Internal and external factors, ranging from a company's historical and future earnings to broader market psychology, are all factored in when determining a stock's value in the stock market. As a result, adherents of technical analysis believe that evaluating a stock's worth based on past financial information is futile, as all those factors are already taken into account when setting the stock's price. This leads to the conclusion that the stock's market price represents a snapshot of all available information.
Prices, much like a dance, move to the rhythm of trends. Even amid apparent chaos, they follow the beat of trends. Stocks tend to continue past trends, making historical trends more significant than random price movements. Most technical analysts agree that price movements follow trends, though there are periods when price movement appears random. If prices were to consistently move randomly, technical analysis would undoubtedly fall short of generating profits in the stock market.
History's tendency to repeat itself takes centre stage. This isn't about a song by a wildly popular girl group from the past, like the New Boys. While Tomok might not be one of the technical analysts in the stock market, he believes history has a habit of replaying itself. This phenomenon is linked to market psychology, driven by traders' emotions of fear and greed. It's based on the logic that excessive fear tends to drive down stock prices, as traders start selling when negative news floods the market. Conversely, overwhelming greed can push stock prices up, a result of conflicting effects. Technical analysts have studied price movement patterns on graphs to analyze emotions and understand price movement trends. This finding is considered relevant because it exposes the recurring psychology behind price movement. Given that these patterns have worked well in the past, it's assumed they'll continue to be effective in the future.
This underscores that technical analysis is not only easy to understand but also accessible to those new to the stock market. Unlike fundamental analysis, which relies on financial statements as the basis for trading decisions, technical analysis factors in the "feel" of the market, a more subjective realm. Regardless of the technique chosen by investors or traders in their quest to generate profits in the stock market, one thing's clear – it's not as simple as it appears. In the intricate world of stock trading, one question lingers: Who possesses the ability to predict and hold the future? In the words of Norman Ralph Augustine: “If stock market investors and traders claim they're experts, why are they selling classes instead of trading stocks to make profits?”
Farid W. Zakaria is a content creator under the Newswav Creator programme, where you get to express yourself, be a citizen journalist, and at the same time monetize your content & reach millions of users on Newswav. Log in to creator.newswav.com and become a Newswav Creator now!
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