Technical analysis

When you've assembled a working list of fundamentally sound securities, you're ready to move ahead with investment decisions that limit your risk of losing money and increase your opportunity to make it. That means determining when, or in some cases if, to invest in specific companies.

When you use technical analysis, you base investment decisions on your assessment of whether the demand for a particular stock or bond is greater than the supply — or whether the opposite is true. If there is greater demand because there are more buyers than sellers, it may be time to buy because you believe that the price will go up.

The logical next question is, "How do you know if buyers predominate?" The answer, for a technical analyst, lies in the patterns of buying and selling in individual securities or the markets as a whole. Point and figure charts, bar charts, and candlestick charts are some of the tools they use to evaluate supply and demand.

These charts, each in its own way, provide data about what's happening with individual securities in the markets. For example, bar charts reveal trade volume, while point and figure charts establish price trends, and candlestick charts track high, low, and closing prices. Analysts who use point and figure charts, for instance, watch price patterns for signals of growing demand for a specific security. They buy when one of the signals they have identified as reliable indicates a strong probability, based on historical patterns, that the security's price will continue to go up. And they make sell decisions in a similar way.

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If you're investing in mutual funds, exchange traded funds (ETFs), or managed accounts, you should still evaluate the overall market and the sector in which the fund or account invests before adding it to your portfolio. But you no longer have the responsibility for evaluating individual companies or determining at what point to buy specific securities — that's the role of the fund manager or managers. Of course, that doesn't mean you're avoiding risk, or that you're guaranteed an acceptable level of return.