What is Technical Decline?
Technical decline is the downward price movement of a security that is caused by factors other than a fundamental change in the security’s value. The forces that power the downward movement relate to technical factors affecting the trading condition of the securities, but not the economic or fundamental factors that affect how companies operate.
- Technical decline is the downward price movement of a security that is caused by factors other than a fundamental change in the security’s value.
- Clear patterns and indicators tend to appear before the market goes into a technical decline.
- Technical analysis is used to help determine the approach of a technical decline.
Technical decline can occur for several reasons. Investors typically notice, however, that when prices are about to dip due to technical factors, there are clear chart patterns and technical indicators that foreshadow the technical decline.
Most patterns or indicators will appear in a way that provides the investors or traders with the understanding that the price dip is not the result of fundamental flaws within the companies themselves.
Using Technical Decline
The basic idea is that a technical decline will be relatively short and that the market will reset itself. However, there are some investors who see the potential for making some significant gains when they occur. The theory is that there will be a narrow window of time when a security falls from its fundamental value. During the window, investors stand to benefit by acquiring as many shares as they can before the security climbs back to its fundamental value.
The more shares purchased, the faster the security will return to its true value. With further research and technical analysis, investors are often able to use the foreshadowing indicators and patterns to help them determine when the window might be approaching.
Technical analysis, in a nutshell, evaluates investments, helping to point out opportunities for profitable trades. It studies both the recent and historical statistical data of how a security trades. Technical analysis is only effective on securities with historical data. Things like volume and price movement are the key factors studied.
Technical analysis focuses on price movement. It also relies heavily on trading signals and other chart tools that depict the strength or weakness of a security.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: