Technical analysis

There is a theory that you can predict future share price (or index) movements by looking at past movements. Commentators who base their forecasts on this theory rather than on economic or balance sheet fundamentals are known as technical analysts or ‘chartists’ (because they use charts to look at price movements).

The idea of looking to the past to predict the future can be effective. Suppose the share price of a company fluctuated between 200p and 250p. This would suggest that at 200p there were investors who considered the shares to be cheap and bought, and that at 250p there were investors who considered them expensive and sold.

If the price were to break above or below its normal levels (‘break out of its trading range’), the chartist, while not needing to know exactly why, would know that perceptions had changed and that the price would be likely to keep moving in its new direction until it hit a new ‘resistance level’, or level where enough investors considered it cheap or expensive to halt the move.

Merryn

Claim 12 issues of MoneyWeek (plus much more) for just £12!

Let MoneyWeek show you how to profit, whatever the outcome of the upcoming general election.

Start your no-obligation trial today and get up to speed on:

  • The latest shifts in the economy…
  • The ongoing Brexit negotiations…
  • The new tax rules…
  • Trump’s protectionist policies…

Plus lots more.

We’ll show you what it all means for your money.

Plus, the moment you begin your trial, we’ll rush you over THREE free investment reports:

‘How to escape the most hated tax in Britain’: Inheritance tax hits many unsuspecting families. Our report tells how to pass on up to £2m of your money to your family without the taxman getting a look in.

‘How to profit from a Trump presidency’: The election of Donald Trump was a watershed moment for the US economy. This report details the sectors our analysts think will boom from Trump’s premiership, and gives specific investments you can buy to profit.

‘Best shares to watch in 2017’: Includes the transcript from our roundtable panel of investment professionals – and 12 tips they’re currently tipping. The report also analyses key assets, including property, oil and the countries whose stock markets currently offer the most value.