Technical Analysis – Meaning, Types, Charts, Strengths, Analysis Process & more
Technical Analysis is the process of forecasting the future price of the stocks based on historical data. It is more like the quotation we have been hearing since our childhood “History repeats itself”.
Technical Analysis Stocks, unlike the fundamental analysis, deals with the price and volume of the stock traded in the previous days/week/month/years.
This includes various charts, technical indicators, historical data, and many other technical aspects/tools for predicting the future price movement of the stock.
In this article, we will discuss each and everything that comes under the Technical analysis of stocks.
We will start with the type and different approach, then we will talk about the different strategies of trading using technical analysis.
You will then read about the purpose of technical analysis, its basis, crucial assumptions, and a lot more details.
What is Technical Analysis? – Meaning / Definition
Technical Analysis of Shares is for price determination of the share by analyzing the price and volume and other factors of the stock in question.
Technical Analysis meaning is simple and it is a form of analysis that helps the traders understand the price movement. It applies not only to the stocks.
You can use it for all types of tradable investment instruments like commodities, currencies, derivatives, and others. It depends on the demand and supply of the investment vehicle.
It takes into account the price and volume of the stock traded in the previous day or previous week/month or a few years. These data from the past help the trader analyze the trend of the price of the stock.
There are different tools for technical analysis which include Charts, technical indicators, and many other strategies.
For instance, the 5-minute chart or the 30 minutes chart – where the price and volume traded of a particular stock is graphed.
Similarly, there is an abundance of such charts and other tools for your analysis purpose.
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Types of Technical Analysis
Technical Analysis Types can be segregated into two which are –
When the analyst looks at the economy first and then his analysis boils down to specific Technical Analysis Stocks, then it is known as the Top-down approach.
To put in simpler words, the person who analyses a stock using this approach first checks the macroeconomic factors – the overall economy then comes to the industry in which the stock falls and finally to the individual stock.
The traders who use this approach for technical analysis may look for the fifty day moving averages and the stocks which broke those average of the market and the industry and accordingly place a buying order.
This approach deals with individual stock. The analyst or the trader looks stocks that have potential growth in the future.
Then they use their technical analysis tools to check the entry and the exit points. It is like the stock is undervalued and the price is decreasing.
So, the trade will use the technical analysis tools – charts or indicators to find the price where he can buy the stock for long term profit.
Learn everything about Technical Analysis here
What is the basis of Technical Analysis?
Charles Dow is considered by many as the father of Technical Analysis. So, his theory for Technical Analysis Shares includes certain factors which are still in use by most of the technical analysts as the basis of technical analysis.
The theorems are –
- Price discounts everything
- ‘What’ is more important than ‘why’
- Price movements are not random
We will discuss all these three in detail below.
Technical Analysis – Price Discounts Everything
In the books for technical analysis, you will find this theorem at the top as it refers to the strength of the efficiency of the markets.
The technical analysts think that the market/current price of a share reflects all information of the company and the share itself.
They believe the market price is the fair value and thus uses the same for analysis. It is because the market price reflects all market participants’ knowledge.
All these market participants are traders, analysts – buy and sell-side both, investors, market strategies, portfolio managers, fundamental and technical analysts.
So, in technical analysis, the analysts interpret all the market information depending on the current market price as they believe it to be the perfect value.
Technical Analysis – Prices Movements are Not Random
Though technical analysis is, mainly about understanding and predicting the price trend price do not trend always. There are periods when and where the price does not move randomly.
If it would have been then traders using this analysis couldn’t make money out of the market. The technical analysts and the traders using the analysis trades when they identify a trend in the market.
The process is like identify a trend, invest or trade when the trend is ongoing and when it unfolds, you will receive the profits(or loss).
The best part of the technical analysis of stocks is that it can be applied to different timespan. You can identify trends for long-term as well as for short-timespan using the technical analysis software.
Technical Analysis – What” is More Important than “Why”
This is a saying because the technical analyst is focused on the price of the financial instruments but not its value. So, ‘what’ price it is trading in the market is important to them.
It is not important ‘why’ the price is so. they have a direct approach to predicting the future price of the stocks and they only depend on the demand and supply for the stock which only influences the price of the stock, as they believe.
Since the ‘why’ involves a lot of fundamental aspects, technical analysts are not bothered about that.
Strengths of Technical Analysis
While the day-traders most trades using this form of analysis, they see a lot of benefits in it. Some of the technical analysis benefits are –
The most important advantage of using technical analysis is the fact that it is purely based on price – market price. The traders and the analysts only focus on the price of the stock. They predict the future price based on the historical prices. It helps to keep away the noise.
Demat-Supply and Price Action
Since the analysis is done on the basis of price, the analysts consider demand-supply are the two primary and also only forces affecting the prices.
It becomes easy to understand the price movements as no other factors are influencing the price as per the technical analysis. They think that the demand and supply of the share incorporate all other information of the company and the market.
Support and Resistance
Technical analysis is nothing without the support and resistance level. These two levels help the traders understand the price movements and if there is any hint of a trend reversal. This, in turn, helps them act quickly and book profits and trade in the right direction.
Everything is organized graphically
Watching a graph and analyzing from the same can be easy in contrast to an endless list of numbers, isn’t it? Since technical analysis represents everything on graphs, it becomes easier for the trader to look for the specific price and volume points and analyst them without getting confused among all the noise.
With graphical representation, few other things also become visible –
- If there is some announcement or news in the company – market, then the price movement will be visible on the graph
- Price Volatility of the past and in the present
- Volumes of stocks traded are clearly visible
- The relative strength of the stock compared to that of the market.
Entry and Exit Points
The indicators are really helpful in suggesting the entry and exit points in the market. It helps in saving your hard-earned money by giving early signals which are more or less accurate.
Even if you miss some price change or couldn’t be able to track it, these indicators will pop up on the charts to indicate the entry and exit points.
Learning technical analysis is easy
If you want to learn technical analysis, you do not need to enroll in any university paying a hefty fee. You can simply take up an online technical analysis course and learn.
Technical Analysis Strategies for Beginners & New Investors
Technical Analysis for Beginners may seem to be tough but it is very important to understand and trade in the market. There are different things that a beginner needs to keep in mind while entering the market using technical analysis skills.
Here is a five-pointer guideline for all your newbies in the market who are depending on the charts and the indicators.
Set-up Trading Strategies
Firstly, you have to set the trading strategies. For a trader who is just beginning his journey can stick to the basic moving averages for tracking the price movement of a share.
The moving average crossover strategy uses a fifty-day and a two hundred day moving averages. The trader needs to track both the moving averages of a particular stock that he wants to trade.
When and if the short-term that is the 50-day moving average exceeds the 200-day moving average, then the price of the stock in upwards and trend and one can buy and vice versa.
Finding the right Stock
The next step is to find the right stock for the right strategy. It means not all stocks can fit into your trading strategy so you need to find the stock that will fit right into the strategy you have adopted.
For instance, the strategy mentioned above is good for stocks that are highly liquid and volatile. Some other stock might require some other parameters.
Find the right Trading Account
The third step is to find the right trading account where you will be executing the trades using the technical analysis strategy. For the beginners, the account needs to have basic moving averages using the candle stocks and other functionality. This will help the trader track the investments using the technical indicators.
Perfect Trading Platform
Trading platforms need to be right for your strategy. The trading platform offers a lot of technical tools that can be put to use by the beginners for tracking and analyzing the market.
Technical Analysis Tool
Technical analysis software needs to be purchased for doing all the analysis. Though the brokerage houses offer the trading platforms where you will find technical analysis tools but it is better to have other applications as well for better analysis. It will help in the maximization of the performance of the strategies that are implemented by you.
Technical Analysis Strategies for Traders – Advanced Techniques
Advanced Technical Analysis for Traders involves multiple indicators or to be specific complex indicators that will help the traders get to a more accurate price or trend for a stock.
Technical Analysis Strategies used in the advanced analysis include Bollinger Bands, Heiken Ashi, Bullish Engulfing Pattern, Bearish Engulfing Pattern, Bullish and Bearish Divergence Signal, and many others.
Advanced Technical analysis is more of a mixing of different trading strategies into one technical indicator or vice versa to get more accurate results.
The advanced technical analyst makes use of pivot charts, Skewness concepts, Cup and Handle concepts, R-Square. It also includes the Fibonacci series, stochastics, and various other concepts.
Advanced Technical Analysis covers a broad spectrum and it includes each and everything that you can think about predicting future prices of the stocks.
Best ways to Learn Technical Analysis
If you want to learn Technical Analysis you have different options available. There are –
Technical Analysis Course
Most of the courses include all the chart patterns analysis, technical indicators, strategies. You can opt for either the basic technical analysis course or the advanced one. You can also pursue one after another for a complete grip on this tool for profitable trading.
Technical Analysis Books
One of the best ways to learn this it by doing self-study. There are hundreds of books available in the market – both online and offline which you can purchase.
You will find all the details of technical analysis in these books and you can read and understand them. If any concept is difficult to understand you can read about it online from other sources to have a better understanding.
There are multiple online tutorials that you can follow along with the self-study curriculum. There are multiple videos of technical analysis professors across the globe who uploads their teaching sessions online for helping students and also earning money. You can follow those videos and have a better understanding of the concepts.
Certified Technical Analyst Course
This is a specialized course for technical analysis enthusiast and who wants to become a market analyst or technical analyst. This is a course with acceptance from across different parts of the world.
You can take this course from different countries. On successful completion, you will be awarded the Certified Technical Analyst degree which you can use with your name. It adds huge value to your resume.
What is the Purpose of Technical Analysis?
Before you get into the concepts, you need to understand the purpose of this analysis. It will give you a clear vision which will, in turn, help you in understanding the concepts well.
So, the primary purpose of Technical Analysis is to predict the price of the stocks. It is done by the analysis of the historical data and information available to us.
With the help of these historical data, the analysts predict how the price can move in the future as well. To support this analysis, there are three premises which need to be understood and they are-
If a market trend is happening right now, if it is in motion, then the chances of its persisting is more than a reversal of the same. Suppose, for example, you are carrying out Technical Analysis Nifty and you see the trend is moving upwards in motion, then it is time to buy.
It is because the maximum chance is this trend will go upward further and so is the price of the contract.
In the age of constant communications, any news about the companies can circulate within a blink of an eye. Technical analysts believe that the fundamentals of the market are always affecting the price of the stocks and it is and the charts of technical analysis are nothing but the reflection of the same.
Since human psychology is always at work when trading in the market, the market reacts immediately to any fundamental changes in the company, and technical analysis helps in quantifying these opportunities by visualizing them clearing on the charts.
History Repeats Itself
The final premise is the most important one as it is the base of technical analysis. The technical analysts believe that whatever happened in the past will again happen and thus they focus so much on the historical data.
As human psychology never change, and human react in the same manner they reacted in the past, so will the market, isn’t it? Supposedly, you were doing Technical Analysis Sensex, five years back when the new government was formed, Sensex rose drastically.
Now after five years, when the election happens and again the party wins, the market will react almost in the same manner. This will reflect on the prices of the stocks as well. So, you can predict the price movement and the direction of it by checking the five-year-old data.
General Steps to Technical Evaluation
Technical Analysis of the Financial market includes a few general steps which a trader relying on this analysis needs to be aware of.
Most of the technicians use the top-down approach where they analyze the economy first and then go down to the individual Technical Analysis of Stock Trends. So, the general steps of this type of analysis would include –
Analysis using Broad Indices
Market analysis using broad indices like NIFTY 50 or SENSEX. One can also choose global indices if trading international stocks. They can use the Dow Industrials or the NYSE composite and others. This will give them an overview of the market.
Analyze a Sector
The second step is to analyze the sector and identification of the sector primarily. So, you need to observe the strongest sectors in the market and also the weakest.
For instance, the IT market or the Pharmaceutical sector is booming at present while the real-estate sector is losing its charm.
You have to analyze on the basis of various factors which may include the historical data and also the future of the sectors. Like upcoming projects in the sector and other information.
Identify Individual Stock
Finally, you need to identify individual stock from the sectors you identified. Here as well you need to identify the strongest and the weakest stocks for better understanding and clarity.
Do you know what makes technical analysis so interesting? It is the versatility of the process. The analysis is not just restricted to single-direction. One doesn’t need to be a CPA or CTA to analyze these charts, though those courses add to the knowledge and skill set of the analysts.
Technical analysis can be implemented on any kind of tradable instrument whether it is stocks or currencies and even commodities and others with the basic concepts remaining the same. This actually because of the tools of technical analysis which we are going to discuss now.
What are the Charts used for Technical Analysis?
Technical Analysis Charts are used for understanding the Technical Analysis Trends. Charts are one of the most important tools for the technical analysts to carry on their analysis.
Charts, as you may know, are numbers presented graphically to understand certain parameters. Here, charts represent the price and volume of the stocks and markets.
Historical price and volume data are plotted on the charts on the basis of time intervals. There are multiple chart patterns based on time-intervals as well as other parameters that we will discuss in the next segment.
Here, we are going to tell you about the different types of charts that you can come across on the technical analysis software. You must make use of the same for better prediction of the price.
As the name suggest, line charts are one of the most common forms of charting pattern. In this, you will find single lines starting from the left side of the graph and moves towards the right.
These lines represent the closing prices of a stock/indices/any tradable instrument. Though, instead of closing price other price variables like opening prices, high or low prices can be used but for most accurate prediction, closing prices are graphed in this chart.
These line charts are required for understanding the general price movement in the current times linked to the historical data. Though it doesn’t put much light on the insights of a security’s price movement, it is useful for the beginners to understand and track the price movement.
After line charts, Bar charts are very popular amongst the traders. It is a basic tool for this analysis and it presents all the four important prices of a stock.
It includes the opening price, high lows, and also the closing price of the security. Thus it is known as OHLC charts as well. The chart is comprised of a vertical line series. These lines represent the prices mentioned as per the time frame of the chart.
To differentiate between the prices, different colors are used. Bar Charts are highly useful for technical analysts as they provide all the prices on one single graph and make easy for the analyst to track the changes and predict the future price movements.
Candle Sticks Charts
If you have heard any technical analyst speak with his or her colleague, then you must have heard this name. It is because Candlestick charts are one of the most used and important charts in this analysis.
This chart is called candlestick charts because the shape of the chart represents a candle-like shape. With a thick candle-like body and a single line extending either upward or downward makes it look like a candle.
These upper and lower ends are known as upper and lower shadows. While the highest point of the upper shadow represents the high price, the lowermost point of the lower shadow represents the lowest price of the stock which you are analyzing.
The patterns are created by both the parts- body, and shadow. Candlesticks charts are most beneficial for understanding a price trend reversal and within a short period as well.
It has the most significant when at the uptrend’s top or at the downtrend’s bottom. The thick part of the candlestick charts represents the gap between the opening and closing prices. It is colored in red or black when the price of the security falls and white or green when the price rises.
These charts are used for understanding the gaps and spotting the same on the bodies. However, it is a space-consuming chart and thus it is a little difficult to track candles forming one are another.
Point & Figure Charts
Another form of charts which were widely used as technical tools is this point and figure charts. Though this chart pattern is not used recently earlier they were very famous amongst the traders.
This chart focuses on the price movements while cutting out all the other information and thus one can get price specific information. Points and figure charts comprise of rising and falling prices of a stock/index and others.
While the rising price is represented by the ‘X’ symbol, the falling price gets represented by the ‘O’ symbol. These symbols are drawn on columns and each of the boxes representing the prices has a specific value to it.
This value must be reached by the price of the instrument in question for warranting the X and O. There is no usage of time in this graph and if there is no movement in price, no change in the chart as well.
This is a different type of charting pattern altogether. This chart doesn’t consider the time frames nor the volume of trading. It was only done on the basis of the price movements.
It consists of bricks of either red or black and white or green. While the red/black represent upward price movements the other represents the opposite movement.
The technique used to do this charting is like one brick is placed when the price moves upward or downward compared to the previous brick and by enough value. There are other criteria as well for placing the bricks.
The bricks can be placed within a minute sometimes and it can even take a day or more for the same. It depends on the condition of the market.
While this charting pattern can be useful for understanding the support and resistance in the market. It can be difficult to understand the market sentiments.
As mentioned above in the advanced technical strategies segment, Heikin Ashi is a charting pattern and concept of advanced technical analysis.
It was originated in Japan and now used in almost all parts of the world by the analysts trading and tracking markets using technical tools. It is more like the candlestick charts but with a difference.
The main difference between the two is that HA charts represent the average price of the security and not the exact opening and closing prices.
The average prices are calculated and plotted on the graph according to the time period. It helps in understanding the uptrend and downtrend more easily and with better clarity.
HA charts represent the prices in a similar color as candlestick charts do. So, when the price moves upward and there is an uptrend (strong) – it is represented by continuously green HA candles.
In this situation, there won’t be any lower shadow as well but only if there is a strong uptrend. Similarly, when there is a downtrend, there is continuous red candles formation without any upper shadows.
HA charts are useful for swing traders and investors. The day traders use this more as a technical indicator, not as charts. The advantage of this chart is, it can be used individually.
Chart Patterns and Analysis
Technical Analysis Charts represent a lot of parameters and it is important to understand all the parameters to use this Technical Analysis Tools properly.
Trend & Trend Line
One of the most important components of a chart is the trend line. This is the line which helps in indicating the price trend of the security or overall market for which the analysis is done.
So, these lines are drawn on different kinds of charts to get the trend of the price. From this, either we get an uptrend or downtrend which is the most important technical indicator for analysts.
The analysts draw reference from the historical price trends as well. Apart from the upward and downward trends, there is another trend which is known as the horizontal trend. This trend means there are highs and lows which are almost constant and there is no such change.
The uptrend is characterized by the higher highs and the higher lows. It means the highs get higher than the previous ones and the lows also improve.
For instance, if the previous high was 50 then today it would be 60 and the previous low was 20, today it would be 25. Similarly, the downtrend is characterized by the lower lows and the lower highs.
A trend can be of different tenure as well. There can be a short-term trend, long-term trends, and also an intermediate-term trend. One single stock can experience different trends in all these three terms.
It can be an uptrend in the short-term and downtrend in the long-term trend and vice versa as well. Thus, it is essential to incorporate the time frame while analyzing the trend.
Technical analysis is based on price and volume to put it in simple terms. So, the volume is one of the crucial factors in this type of analysis. Volume is the number of shares that are traded for a particular security in one single day (it can be any period though).
So, for instance, ABC Company’s 4.5 lakhs shares are traded today, so the volume traded for ABC Company’s shares is 4.5 lakhs. The volume helps in understanding the strength of the trend or price movement of a share.
It is the number of shares that are traded that determines the strength because if 100 shares are traded in an upward trend, and 1 lakh shares are traded in some other stock having an upward trend, then the latter stock has a strong upward trend than the previous one.
Generally, volumes are represented in a bar chart at the bottom and higher the bar, the higher is the volume of shares traded. Apart from confirming the strength of the trends, it also confirms the patters of charts and trends on it like head & shoulder pattern or the triangle pattern.
The third factor that you need to understand in technical analysis is Momentum. Momentum is the speed with which the price is changed or moved from one to another for a stock in the market.
It is the rate at which the price of the stock changes over a given period. For example, ABC’s price change over ten days – its rate of price changed over these ten days is the momentum of ABC’s shares price.
It is mixed with the RSI Index which assigns value to the stocks from 0 to 100. This is for the determination of overbought or oversold market conditions. It is tracked regularly generally.
Support and Resistance
These two can be referred to as one of the most important concepts of technical analysis. If you listen to the analysts speaking in the interviews or talking about daily price movements of stocks on TV, you must have come across these two terms, haven’t you? Ok, so support and resistance are two levels which once broke, tend to a trend reversal as per the technical analysts.
Support is a price level where the demand for the stock is so high that the price cannot drop below that. It can be referred to as the previous highs.
While the resistance level is the previous lows and a price level where the supply of the stock is high and thus the price cannot move upward from that level.
Now, if the support level is broken or if the price dips below the support level, then it indicates a bearish trend and when the resistance level is broke, then an upward trend or bullish trend is suggested.
It is like the floor and the ceiling prices of the stock as well. Now, once the resistance line (read level) is broken, that becomes the new support level or line.
Due to the fact that price moves between these two levels and breaking any of these two levels indicates a reversal makes both these two concepts highly crucial for the analysts.
In Technical analysis, moving average also plays a great role. As observing all the lines for closing prices, opening prices, highs and lows can become confusing at times, moving averages can show you the price trend clearly as averages of these prices can be plotted simply on the graph without a mess.
You can track the averages daily and it will be easy for you to understand the price movement. You can either use a simple moving average or exponential moving averages, depending on the type of security you are analyzing.
A simple moving average is calculated taking all the closing prices for a given period and then summing them up and dividing by the number of stock prices used.
For example, you can calculate a 15-day SMA. Then you will be adding all the 15 closing prices for fifteen days and then divide the same by 15. The number derived is the SMA for the 15-day moving average of the stock.
EMA is nothing but the weighted moving average. In this, weights are assigned to the prices and for the recent prices, the weights are more while less for the older ones. And then the process is the same as above for SMA.
Oscillators and Indicators
Finally, coming to the indicators and oscillators which are regarded as crucial tools for technical analysis apart from the charts. Indicators are nothing but mathematical calculations which are based on statistics.
Price and volume are the statistics in most cases. These indicators are created for signaling buy and sell in the market. It is required for understanding the entry and the exit in and out of a trade/position.
Multiple indicators help in understanding the overbought and oversold condition of the market. Oscillators are nothing but the indicators which can be used in a short time span for indicating the same factors and conditions.
Key Assumptions of Technical Analysis
Technical Analysis in Stock Market is done based on some assumptions. In Technical Analysis Basics, you will find one primary assumption and that is the prices of the stocks are influenced only by demand and supply for the stocks.
So, the technical analysis ignores or chooses to ignore other factors affecting the price of the stocks. So, on the basis of this primary assumption, there are three assumptions which every technical analyst makes –
The price change is not artificial
A stock price can have an artificial price change due to various factors. Some of them are like dividends, stock split, and others of similar nature. Technical analysts’ job becomes difficult in these conditions.
It is because the price charts are affected by the dramatic price change. They adjust these price changes by adjusting the historical data which was there before the price change.
The liquidity of the shares is high
For technical analysis, stocks which are heavily traded are preferable. It is because heavily-traded shares are more liquid. The high liquidity of the shares further increases its demand.
The price of the high-liquidity shares doesn’t change drastically in general. While on the other hand, the thinly-traded shares or the shares with less liquidity quotient are not preferred by the technical analysts.
As these shares’ price can be easily manipulated by individual share investors as the number of sellers and buyers are less.
No news and announcement of extreme nature
As the technical analysts like to believe that prices of shares are only affected by demand and supply, so they chose to ignore any extreme news about some of the stocks as well. any news about the company whose shares you are trading can change minutely or drastically if there are certain announcements in the company like merger & acquisition or meeting of the CEO with some big foreign company as investors expect new products and services and others.
Technical Analysis Facts You Should Know
There are many interesting facts about Technical Analysis in Share Market. some of them are mentioned below –
Father of Technical Analysis
If we follow the books and journals, then Charles Dow developed the concepts of technical analysis. However, this is up for debate as many claim Charles Dow is not the first one to develop this form of stock analysis.
Difference between Technical and Fundamental Analysis
Often there is a clash between these two and it is thus important to know what makes them different from each other. The technical analysis depends on charts while fundamental analysis depends on financial statements. The former id generally did for day-trading while the latter is for investment in the long-term.
Types of Technical Analysis Indicators
There are multiple indicators in technical analysis and the most important ones are –
- Moving averages
- Parabolic SAR
- Bollinger Bands
- Average Directional Movement Index.
- Average True Range
- Stochastic Oscillator
- Commodity Channel Index
- Relative Strenght Index
Do you need a university degree for becoming a technical analyst?
No, you do not need to have any university degree to become a Technical Analyst. You can join any online or classroom course at your convenience or just read by yourself and learn technical analysis. You need to understand the charts and that what makes you a technical analyst.
The core of Technical Analysis
The core of technical analysis if obviously PRICE. The reason behind is price derived not only by demand and supply but many fundamental forces and thus it is important to incorporate the same.
So, even when technical analysis does not consider any fundamental factors but the price itself is precede of fundamental factors. This makes the whole analysis meaningful.
Limitations of Technical Analysis
Though the daily traders and also many investors follow these analyses but technical analysis charts have few drawbacks as well.
The bias of the Analysts
Analysts are biased and they only focus on the price which seems a benefit to them and it is obvious but at times, they need to look for the other factors as well which influence the price.
Moreover, the analysts can be biased in themselves as well. For instance, if an over-optimistic or bullish person analyzes a chart, he or she will only find price moving up or uptrend and vice versa for an analyst who is bearish. So, personal biases can overpower the essence of the charts and analysis.
A chart can be interpreted differently by two analysts. This is because of the above-mentioned point that is bais. So, two individual analysts having their own personal biases will end up interpreting the same chart in two different ways. This again can lead to confusion.
Technical Analysis is slow or late
As the analysis depends on the historical prices when the trend is identified, a good portion of the price has already moved up. So, a person loses on the same part of the profit. It also changes the risk-reward ratio most of the time.
Every stock is different
Technical analysis is not applicable for all the stocks in the same manner. As every stock is different, you need to understand which indicator, oscillator, charts, and time-frame will be right for the kind of stock you want to trade which is a difficult process.
Technical Analysis – Conclusion
After looking at all the aspects of Technical Analysis you can understand that this is beneficial for those who are into the daily trading business.
Technical Analysis Stocks are direct and to the point making it easy for the traders and analysts to predict the future price easily. However, there are many biases as well and thus it is not applicable for a long-term purpose.
The charts, indicators are the main tools of technical analysis, and these help the traders to understand the price movement patterns, the trend in the market on which the traders navigate the market.
Technical Analysis FAQs
Ques – Where can I do technical analysis related to stock market?
Answer – Technical analysis is the process of anticipating the future price of the stocks based on every data from the past. Technical analysis dogs deals with amounts and volume of the stock which is stated in the previous weeks or months or even years. In this very website or an article we provide you with a detailed theory, various charts and technical indicators of technical analysis and how you can go ahead with it.
Ques – What are the different approaches of Technical Analysis?
Answer – Top down approach: The trader uses this approach first looks at the overall economy then comes to the industry wherein the stock falls and ultimately to the individual stock
Bottom up approach: The trader looks for stocks that have potential growth in the coming future, uses the technical analysis tool to check the entry and exit points and tries to search the price where he can buy this stock for a long-term profit.
Ques – What does ‘Price Discounts Everything’ mean in technical analysis?
Answer – It refers to the strength of the market officials. The analyst thinks that the market price of a particular share gives out information of the company. They also believe that the market price is the absolute fair value.Therefore, in technical analysis, the analysts interprets all the market information depending on the recent market price because they believe that it is perfect.
Ques – What does ‘Prices Movements are Not Random’ mean in technical analysis?
Answer – Technical analysis is all about understanding of predicting the price trend. Nevertheless, the price does not move just randomly. The process of figuring out that the price wouldn’t always be such as used by the traders and analysts to identify a trend in the market. This is the best part of technical analysis of stocks that it can be applied to different time span.
Ques – What are the entry and exit points in technical analysis?
Answer – The entry and exit points are those where you’re entering the market and exiting the market, with entering means buying and exiting means selling. Whenever you are trying to trade directions from the weekly chart, make sure to synchronise it with the daily chart to time entry.
Ques – What are the benefits of doing technical analysis?
Answer – The benefits of doing technical knowledge this is such that can be applied to practically any reading instrument at any given point of time. It can be used to evaluate stocks, commodities or even interest rates.
Ques – Where can I learn technical analysis easily?
Answer – Technical analysis can be learned by beginners in a short span. It is not as easy as one would think but nothing as extravagant that cannot be achieved as well.
- Set up a trading strategy
- figure out the right stock
- Find the perfect trading account for you to begin
Ques – Where can I learn advanced technical analysis strategies?
Answer – Advanced technical analysis involves a lot of indicators which helps the traders to get a more accurate price. The strategies used are Bullish Engulfing Pattern, HeikenAshi, so on and so forth. They also make use of cup and handle concepts which include the Fibonacci series. You can refer to a few charts provided in this very article on a website to get an idea of where you can learn advanced technical analysis strategies.
Ques – What is the purpose of Technical Analysis in stock market?
Answer – Technical analysis is basically a reading instrument employed in order to analyse investments and find out reading opportunities in price trends and patterns. It believes that past trading activities and price changes can be a valuable and significant indicator of the securities future price movements as well.
Ques – How to do technical analysis – step by step process?
Answer – Identify a particular trend
- Mark any resistance you see
- Search for any pattern
- Set up with high probability
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