How to Start Technical Analysis? – Components, Process, Application & more

The concept of trading requires proper knowledge of technical analysis. It is about knowing the trends in the market and being able to decipher a detailed analysis.

You must know the different classification of charts, its construction, and best practices.

About Technical Analysis & Process to Start

In order to start technical analysis, once must understand the concept of technical analysis.

There are two common types of analysis, namely, Fundamental and Technical. These differ from each other according to their literal meaning.

While fundamental analysis deals with maintaining assets or equity, for example, a balance sheet; technical analysis on the other hand deals with a study of historical market data.

Technical data representation takes place using charts of different types and nature. It focuses on market dynamicity regarding the stock prices and provides a view of supply and demand via charts.

As we said, it solely showcases the present and past market conditions and does not predict the future.

But, the data available upon using technical analysis is sufficient for understanding the market status in emotional aspects. It is to further assume the next trends that can be coming in the future.

Technical Analysis provides an idea of possible risks and profits to traders. Now, it estimates the ongoing and past behavior of the market.

It focuses on the current price and trading volume information. It studies the price movement in the stock, including the financial attributes of the company.

Traders can easily track changes in the trends from both perspectives, positive and negative. The market action facilitates everything, and the prices move accordingly, changing the trends.

It also shows the tendency of history to repeat itself.

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Characteristics Technical Analysis

In order to start technical analysis, once must understand the basic concepts.

• Price moves depending on the trend. These moves can be up-trend, down-trend, and sideways
• History tends to repeat itself
• Price discounts everything in the market
• Runs on the principle of economical supply-and-demand
• Recent entries are stronger than past entries
• Role reversal takes place after supply or demand areas break

Components to Start Technical Analysis

The process of stock selection in equity or stock market is a complex task that involves decision making by employing technical analysis.

The three basic components of technical analysis as are follows:

• Charts
• Indicators
• Overlays

Charts

Charts are a pattern that describes the movement of prices on a plain. They analyze price behavior and visualize the patterns and trends within the available data.

Traders can use different types of charts, i.e. line charts, bar charts, or candlesticks charts. Here, bar charts and candlesticks charts depend on OHLC, that is, open, high, low, and close characteristics.

Indicators

Indicators further have two categories, range-bound, and non-range bound. The example of range-bound indicators is the relative strength index, and that of the non-range bound is volume.

They identify momentum, trends, the flow of money, and the volatility of a security. They contribute to the decision-making process by actively combining with specific charts to buy, sell, or hold a stock.

Overlays

Overlays are the indicators that use the same scale as prices. The representation of it on the chart looks like an overlay, and hence, the name.

The Moving average, envelops, trend lines, parabolic SAR, and Bollinger band are some overlays that are widely in use by traders to recognize the factors.

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Decision-making Process in Technical Analysis

Another important aspect in starting technical analysis is the decision making process.

The decision-making process in the technical analysis consists of the following tools:

• Simple and exponential moving average
• Relative strength index
• Moving average convergence/divergence
• On balance volume

Simple and Exponential Moving Average

The simple moving average only calculates the average of daily volumes by adding the recent entry and discarding the earliest entry.

It values the latest volume, keeps adding it, and moves forward by deleting the oldest volume. The daily averages then join together to form a continuous line that makes up the moving average.

The Exponential moving average values the recent data points and, its calculation includes a period and percentage-based option.

It is a technical indicator that generates more signals because of the weightage on the latest price. It is a comparatively strong tool.

Relative Strength Index

The Relative strength index calculates a value between 0 and 100 where a small value says that the stock was oversold and a large value says that it was overbought.

The calculation is simple and follows the use of the formula, 100-(100/(1+(up close average of the day/down closes average of the day))).

Moving Average Convergence/Divergence

The Moving average convergence/divergence is a momentum indicator where the MACD line is the subtraction of the 26-day exponential average from the 12-day exponential average.

The second line is the signal line which is a 9-day exponential average line.

On Balance Volume

The On balance volume is an indicator that undergoes a calculation of the addition of volumes when the stock prices rise, and subtraction of volumes when the stock prices fall.

A decline in the OBV line means a decrease in stock prices and, a rising OBV line indicates an increase in stock prices.

These tools predict future changes in the stock prices by depending on the past pattern of stock prices. Investors depend on technical analysis to decide whether the stock is in uptrend or downtrend.

This analysis can be in any time frame ranging from daily, weekly, or monthly fluctuations in the stock price.

Application of Technical Analysis on any Asset Type

Since, all the process are completed, you can now start the application of technical analysis.

Using the components of technical analysis and the available price variables, traders can benefit. The traders and investors can use the concept of technical analysis on any asset class.

This application of technical analysis on assets is possible by only learning it once, whereas, this is not the case with basic analysis where each application requires a separate learning technique.

Also, that can be time-consuming and costly to apply to everything. In the basic analysis, each time an individual or organization chooses a commodity, basics change and it requires analyzing.

Therefore, technical analysis has a bigger advantage over this situation as all commodities and equities adopt the same concept.

Understand Trading Actions

Different factors to understand the trade include the criteria of the OHLC in the charts.

As the charts represent the condition of stocks at different times, it is practically not possible to track. You won’t know the place of various traders at different price points.

Once you have started the application of technical analysis, you should understand about various trading actions.

So, a summary of trading actions is essential to track only the important points during a market transaction. By using OHLC, traders can bring a summary of the price action.

Here, OHLC is the acronym for Open, High, Low, and Close stock entries.

The open marks the opening price of a trade after the market opens for trading.

The high shows the highest price in a place where the participants show interest to work.

The low showcases the lowest point at which the market participants indulge to transact for a given day.

The close represents the final closing price when the market closes for a specific period. It acts as a specific note for the intraday strength.

After the market closes, there is a comparison between the opening price and closing price. If the closing price is greater than the opening price, it means that it was a positive trading day.

If it is not greater than the opening price, then it was a negative day.

Start Technical Analysis – Conclusion

Finally, these four priced variables are the main data points in technical analysis. These represent the important prices on the chart. They reduce the need to refer to those values for the entire day.

Traders need to remember that even if the market discounts everything. The “how” is more important than “why”.

You have to understand how the price reaction makes an impact on the insider’s trade. It is better than knowing the reason behind the successful trade.

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