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Can I predict the future value of shares? Technically, yes.

I keep hearing experts on the stock market talking about how technical analysis says it could be risky to be buying shares right now. What is technical analysis and do you agree? How reliable is this analysis and should I, as a novice share buyer, do some study on it?

Chartists are the people who are often associated with technical analysis. These people look at the charts for stock markets, individual shares, bonds, currencies, etc. and then they look for patterns that can be useful for predicting where markets are heading.

A method of evaluating securities is by analysing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

Investopedia says technical analysts “believe that the historical performance of stocks and markets are indications of future performance.”

Here’s a great example: “In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, the technical analyst's decision would be based on the patterns or activity of people going into each store.”

I think both kinds of analysis should be conducted before you buy or sell a share and if both are giving the same answer then that’s a good sign but is no proof that the timing of the decision, nor the decision itself, will make you money.

For example, a government decision such as a resource tax could change the equation. A major event such as the 9/11 attack on New York completely KO’d the conclusions made off charts, though a mate of mine says the charts on gold did indicate that some people took a big position on the precious metal not long before the planes became flying bombs in the Big Apple.

The more you learn about technical analysis, the better an investor I believe you will become but never get too carried away with the conclusions.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Thursday, June 10, 2010

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