Technical Analysis (TA) is seen by many experts and pundits as a useful alternative to fundamental analysis.
However, in the past some dedicated supporters of fundamental analysis have looked down their noses at TA, suggesting it's no more effective than reading tea leaves. So it may come as a surprise to learn TA is used by such successful investors as Mark Mobius, fund manager at Franklin Templeton.
Check out Money Observer's editor Andrew Pitts interview with Mark Mobius on iBall TV.
At Interactive Investor we believe TA and fundamental analysis go hand in hand - which is why we offer a comprehensive set of share factsheets and a derivatives platforms complete with powerful technical analysis tools.
We have presented a series of educational articles on TA explaining how you can use the major chart patterns, featuring such illuminating names as Moving Averages, Oscillators and Bollinger Bands.
If you apply these to recent shares and indices movements you can get a real understanding of how to apply them in your own trading.
The power of TA is that it gives you an indication of where a price may be headed using some simple tools, without the need to spend days researching company reports (check out our free service for company reports). You can then use resources such as our factsheets to double check there are no fundamental company issues with a potential investment you've picked using TA.
We have built our CFD and Spread Betting platforms around our TA tools so you can identify potentially profitable opportunities in a wide range of investments, eg shares, indices, commodities and forex, in major world markets. This gives you the ability to trade around the clock.
Spread Betting complements share dealing as it allows you to hedge and, because of its leverage, you can hold more positions with the same amount of capital, allowing you to diversify your portfolio.
So what is the origin of TA? It can be traced back to Japanese rice traders thousands of years ago but it is only some 100 years ago that the real rule based foundation was laid.
Charles Dow, an editor of the Wall Street Journal and the inventor of the Dow Jones Industrial Average Index, penned a series of editorials which we refer to as "Dow Theory". These editorials reflected Mr Dow's beliefs that the stock market discounts all available information and how the market could be used to measure the health of the business environment. Much of what we know today as technical analysis has its roots in Dow's work.
For the technical analyst there is only one God. It is the current price. It reflects demand and supply, which in turn reflects the combined emotions of hope, greed and fear of the participants in the market.
Charles Dow argued that the markets and the economy trends, like Newton's first law states "once an object is propelled into motion, it tends to stay in motion". In other words, once a market begins to move higher, the odds favour that it will continue to move higher.
Within these major trends, which Charles Dow called the Primary Trend, we can have smaller trends which temporarily move contrary to the primary trend. This concept is illustrated in the graph below. As long as the last low is higher than the previous low, the trend is up. Once this pattern changes, the trend is said to have changed too.So what is the Dow Index saying in this chart? It has already priced in a significant downturn in the market, and there is no silver lining on the horizon just yet, at least not on the chart. So remember that once a trend sets into motion, it tends to stay in motion, irrespectively if it is a stock, a commodity, a currency or an index, and trends always tend to go much further than most believe.