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Siddharth Wagh - essay - HW assnt 1

Siddharth Wagh - essay - HW assnt 1 - UNDERSTANDING...

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1 UNDERSTANDING TECHNICAL ANALYSIS USING THE BULL FLAG PATTERN By Siddharth Wagh MS in Electrical and Computer engineering Course: Software engineering - Web Applications Submission date: 5 February 2008
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2 Stock market prediction is the act of trying to determine the future value of a company stock or other financial instrument traded on a financial exchange. The successful prediction of a stock's future price could yield significant profit. The stock market is not an efficient market . Herding behavior is common among investors, all investors do not get all information at the same time and the time it takes to evaluate information before they act differs between investors. Many investors do not show rational behavior. Greed and fear are strong feelings and may result in panic sales and stock market bubbles. Hence, to regulate the stock market to obtain maximum profit or achieve a certain objective in general without falling prey to inconsistencies, predicting stock behavior is a pressing requirement. Prediction methodologies fall into three broad categories which can (and often do) overlap. They are fundamental analysis, technical analysis (charting) and technological methods. Fundamental analysis of a business involves analyzing its income statement, financial statements and health, its management and competitive advantages, and its competitors and markets. It is more subjective compared to technical analysis. Fundamental analysis maintains that markets may misprice a security in the short run but that the "correct" price will eventually be reached. Profits can be made by trading the mispriced security and then waiting for the market to recognize its "mistake" and reprise the security. On the other hand, Technical Analysis is an approach that uses information of past stock behavior in order to forecast future price movements. Within the technical analysis community there exist several schools with different techniques, but they all have in common that they use price and volume history. A basic thought is that it takes time before the market reacts upon new information and that pattern often occur in price behavior which makes forecasting possible. We limit our focus to technical analysis which has time and again proved its supremacy over other methods. There are several factors that explain why technical analysis works: Most speculators on the market act upon fundamental analysis, so that kind of facts influence stock prices strongly. But all operators do not get this information at the same time. When there are positive news of a company, those acting immediately can buy shares for a lower price than those getting the news later. It is part of a company's nature to rest in good or bad periods. In good periods, the probability that good news will be followed by more good news is larger than the normal. Because the market often reacts on every single event this may result in a chain effect - a positive trend for the stock.
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