In the previous blog post we analyzed stocks using the PE ratio, in today’s blog post I’m going to introduce you to something new and quiet useful if you are able to grab the concept, let me not waste time and welcome you to Technical Analysis

What is Technical Analysis?

Technical analysis (TA) is a method of analyzing stocks based on the statistics generated by market activity i.e historic price movement and data volume.
TA does not involve calculating the PE ratio or the Book Value like we did in the previous blog post but here we use tools such as charts, pattern and trends to try and predict future share price movement.

TA is based on the following 3 beliefs.
1. Everything is factored in the Price
2. Prices move in Trends
3. History repeats itself
Everything is factored in the Price
Technical Analysts believe that the prevailing price of a stock reflects its fundamentals, the broader economic picture even market psychology so there is no need of calculating things such as PE ratio or book value since everything is in the price.

Prices move in Trends

In case you have noticed stocks don’t move in a straight line but it’s a movement of high and lows and it’s this movement that make a trend, there are 3 types of trends namely
1. Upward Trend-it’s a series of higher highs or lower highs I’m sure you have heard market commentators using phrases such “stock is trading at a 52 week high”

Figure 1 an upward trend

An example of an upward trend
Point 2 is the first high, point 3 is the low that is established after the price falls from the first high, for this to remain an upward trend each new low must not fall below the previous low i.e 5 on the chat. KCB traded at 26.25 two weeks ago which is a 32 week high, after trading at that price it fell to 26, instead of bouncing to set a fresh new high of 26.50 it fell to a new low of 25.75 which is below than the previous low, in this type of scenario we say the TREND HAS REVERSED also known as TREND REVERSAL and it’s a good signal to sell your security and wait until the trend re establish itself.

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