Question

Discuss the following questions:

What is the purpose of technical analysis, and why are those who use technical analysis referred to as chartists?

What is a moving average? What is the significance when a stock’s price crosses a moving average of the stock’s price?

What is the difference between “support” and “resistance” in technical analysis?

Answer 1

· The purpose of technical analysis is to understand the price patterns occurring and forecast the price patterns that can occur in future. Technical analysis is the study of the price pattern and how they have been forming. The reason why they are called chartist is because all price pattern is presented in terms of some charts, be it candlestick pattern or bar chart or other methods, they all are presented in the form of charts and that makes it easier to identify the patterns in the price movement.

· Moving average is a technical indicator which is simply a arithmetic average of the price of last certain periods and it draws a line on the chart. The significance of the moving average in terms of stock price crossing is it shows bullish or bearish behavior. When the price is above the moving average line, the stock is said to be bullish and when the stock is below the moving average line it is said to be bearish.

· Support and resistance are technical indicators which act as a price level beyond which the price either is expected not to fall or not to rise further. Support is a level where there are enough buyers available so that price does not go down beyond that, resistance is a level where there is enough selling activity so that the price faces a resistance while going up.