Technical Analysis
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Technical analysis: Essentially the making and interpreting of stock charts. Its practitioners, called chartists, study the past for a clue to the future movements. The weak form of the efficient market hypothesis directly attacks technical analysis. They believe that the market is only 10% logical and 90% psychological and that people base their investment behavoir on what other people have been doing in the past. This in done by studying the movement of common stock prices and the volume of trading. Malkiel expresses his distaste of technical analysis. According to him, if past prices contain little or no useful information for the prediction of future prices, there is no point in following and technical trading rule for the timing of purchases or sales.
- Is an attempt to measure the psychology of the crowd and its propensity to build castles in the air.
- All information about earning, dividends, and the future preformance of a company is automatically reflected in the company's past market prices.
- Prices tend to move in trends: a stock that is rising trends to keep rising, whereas a stock at rest tends to remain at rest.
- Castle in the Air Theory
- This theory analyzes how the crowd of investors will act in the future and the tendency in periods of optimism to build their hopes into castles in the air. Investors try to beat the gun by estimating what investment situations are most suceptible to public castle building and then buy them before the crowd.
Random Walk | Efficient-Market Hypothesis | Fundamental Analysis | Technical Analysis | Non-Random Walk Theory | Market Efficiency vs. Behavioral Finance
