Technical Analysis

Technical Analysis (TA) is a trading tool to identify trading opportunities by analyzing price movement, volume (number of shares traded), and time.

Technical Analysis is a method of forecasting future price change based on past price movements. Technical Analysis is an art and science to evaluate a better trading possibility or outcome.

Technical Analysis the studying the demand and supply of stocks, indices, commodities, future, or any other instrument which has historical data. It uses patterns, indicators, and various other tools to analyze.

Technical Analysis may be used to study intraday (1-min, 5-min, 10-min, 15-min, 30-min, or hourly), daily, weekly, or monthly price data for many years.

Fundamental analysts evaluate stock/security’s intrinsic value. Technical analysts focus on patterns of price movements, trading signals, and various other analytical charting tools to assess a stock’s strengths or weaknesses.

In other words, Fundamental Analysis of “Why” the price is at a Current Market Price (CMP)? Whereas Technical Analysis focuses on “What” to do at Current Market Price (CMP)?

Technical Analysis Framework

Charles Dow considered being the father of Technical Analysis, from which the Technical Analysis framework derived. Underlying three assumptions are:

  1. The market discounts everything.
  2. Price moves in trends.
  3. History tends to repeat itself.

1. The market discounts everything

Technical Analysis considers only prices and ignores all fundamental Analyses of the company. Technical Analysis assumes that a stock’s price reacts to everything that has or could affect the company at any point in time.  

2. Price moves in trends

“Trade with the trend” is the underlying logic behind Technical Analysis. Once a trend is established, the future price movement is more likely to be in the same direction as the trend unless it reverses and creates a new trend. Technical analysts frame strategies based on this assumption only.

3. History tends to repeat itself

People have been using charts and patterns for several decades to demonstrate patterns in price movements that often repeat themselves. The repetitive nature of price movements is attributed to market psychology.

Technical Analysis for Different Markets Too

The beauty of the technical analysis is that it is applied effectively to trading, short-term, medium, and investment time horizon.  A technical analyst can use stocks, derivatives, bonds, options, commodities, mutual funds, and other forms of investments for buy and sell opportunities.

The best way to use technical analysis depends on one's approach to the market.  Everyone invests differently.  Each investor has different levels of stress, different temperaments, and different amounts of capital.  It is essential to apply technical analysis to complement one's personality and personal investment philosophy.

How to Use Technical Analysis?

Researchers across the world developed hundreds of patterns, indicators, and signals for the trading system. Trading systems were developed for forecasting and trading on price movements. Indicators focused on identifying the current market trend, support and resistance areas, and strength of a trend.

Indicators, charting patterns, trendlines, channels, moving averages, and momentum indicators are commonly used in technical analysis.

Some broad types of indicators are:

  • Moving averages
  • Support and resistance levels
  • Certain chart patterns
  • Volume and momentum indicators
  • Oscillators

Who are Traders/Speculators?

A Trader/speculator is a person who

  • trades derivatives, commodities, bonds, equities, or currencies
  • takes large risks
  • sacrifice the safety of their principal amount
  • hopes to make large small-term gains
  • anticipates future price movements
  • often use technical analysis and other trading tools to make investment decisions.
  • Buys stocks at a lower price and sells at a higher price
  • Sells stocks at a higher price and buys at a lower price
  • Not much worried about the financial reports of a company
  • Is interested mainly in quick profits.

To summarize :
Traders/Speculators are typically sophisticated, risk-taking traders with expertise in the market in which they are trading and will usually use highly leveraged investments such as futures and options. For example, purchasing a very volatile stock hoping to make profits by few movements, in points of the stocks traded.

Investors are those who tend to buy stocks they believe will soon see large growth in price and then sell them at the top of the market. For Example:
Investments in a company’s stocks which has got a strong financial background.

Hedgers buy futures and options mainly to protect their financial interests. For example, a Goldsmith buys a Gold futures contract in order to protect the cost of Jewellery production. This is hedging the risk that Gold prices will rise. The Goldsmith is willing to spend a certain amount to protect against a potentially larger loss in the future.

What is Trend?

Trend refers to the direction, course, tendency, swing, shift, or movement. In Stock Market Trend indicates the movement of Stock price. The price of stock whether it’s rising or falling can be made out by a technique called Trend Analysis.

Under Trend Analysis there are basically three types of Primary Trends which are as follows:


1. Up Trend

Upward Trend refers to a process of gradual change in the stock price from a lower price to a higher price. It is defined as a “Series of higher highs and higher lows”.

Uptrend, also known as a rising trend, is the trader’s favorite trend type. In this trend, stock price trends in an upward direction by making a series of higher highs and higher lows. Though it is safe to make a buy decision anywhere in an uptrend, it gives the best returns when bought near pullback or intermittent lows.

Uptrend lines act as support. As long as prices remain above the trend line, the uptrend is considered intact. A break below the uptrend line indicates that demand has weakened and a change in trend could be imminent.


2. Down Trend

Downward Trend refers to a process of gradual change in the stock price from higher price to lower price. It is defined as a “Series of lower highs and lower lows”.

A downtrend line has a negative slope and is formed by connecting two or more high points. Downtrend lines act as resistance. As long as prices remain below the downtrend line, the downtrend is intact. A break above the downtrend line indicates that supply is decreasing and that a change of trend could be imminent.


3. Sideways Trend

The sideways trend describes the horizontal price movement that occurs when the forces of supply and demand are nearly equal. A sideways trend is often regarded as a period of consolidation before the price continues in the direction of the previous move.

A sideways trend is defined as a “series of relatively equal highs and equal lows”


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