Technical Analysis for International Investors

How Technical Analysis Can Help Improve Performance

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Most international investors rely on fundamental analysis when making investment decisions. By looking at price-earnings ratios, value investors seek to identify companies that are trading below their intrinsic or peer-based value. Growth investors look at revenue and earnings growth rates, as well as industry trends, to identify companies that may experience multiple expansion and higher share prices that come as a result.

In this article, we will take a look at a second form of analysis known as technical analysis, which can be extremely helpful when timing the purchase or sale of assets.

What is Technical Analysis?

Technical analysis is a form of securities analysis that incorporates elements of mathematics and crowd psychology to predict future prices. For example, moving averages might be used to instantly assess the short- and long-term trends in price if an investor wishes only to consider companies that have generally been trending higher. These techniques can be helpful when determining exactly when to buy or sell a stock chosen with fundamental analysis.

There are two different types of technical analysis:

  • Chart Patterns - Chart patterns are simply geometric shapes and lines drawn on a stock chart that provides insights into crowd psychology. For instance, a support trend line represents a price where there tends to be more buyers than sellers of a stock and may represent a good time to establish a position as the price nears.
  • Technical IndicatorsTechnical indicators are mathematical calculations that are plotted onto a stock chart. These calculations may be plotted over the top of the price (e.g. moving averages) or in a separate chart (e.g. MACD or RSI). For example, a rising RSI indicator suggests that a stock may be becoming overbought.

    Many technical analysts prefer to use a combination of these techniques. With literally thousands of different patterns and indicators, it’s important to try out various techniques until you find something that works consistently.

    Drawbacks of Technical Analysis

    There are many people that claim to have developed fully automated technical analysis-based trading systems that generate outrageous returns, but none of them have joined the ranks of Warren Buffett or Peter Lynch and made billions of dollars. In reality, technical analysis is all about probabilities rather than certainties, which means that technical analysis techniques will often send the wrong signal – the goal is to be more right than wrong.

    Technical analysis can also be difficult to master since it’s both an art and science. Whereas an analyst can quickly calculate a P/E ratio, identifying chart patterns can be a lot more difficult until enough experience is gained. The key to success is practicing these forms of technical analysis and backtesting them to see how they would have performed. Past data doesn’t guarantee future performance, but it helps assess the viability in a quick and easy way.

    Integrating Technical Analysis

    International investors can begin integrating technical analysis into their decision-making processes by starting with the basics.

    For example, an investor may decide to hold off on buying a growth stock that has been fundamentally vetted until it the Relative Strength Index – a momentum indicator – moves above the 50 mid-point. The goal would be to ensure they’re not jumping onboard the opportunity too far in advance of a move higher.

    Some great beginner technical analysis techniques include:

    • Trend lines – Start connecting series of lows and highs to form upper and lower trend lines above and below the current share price. Try to time purchases when the price rebounds from the lower trend line and sales when the price hits the upper trend lines.
    • Moving Averages – Plot 50-, 100-, and 200-day moving averages and look for crossovers between them. For instance, a 50-day moving average crossing above a 200-day moving average could be a bullish sign and mark a shift in momentum.

      Over time, it’s important to experiment with different rules for buying and selling signals, as well as different technical indicators and chart patterns to discover what works best for them.

      The Bottom Line

      Technical analysis is not a silver bullet for generating guaranteed returns, but it can be useful when deciding when to buy or sell securities. While it’s easy to get started, technical analysis can be difficult to master and takes practice to integrate into everyday investing.