Technical Analysis is a popular technique that gives you direction to understand about ups & downs of a particular stock. It helps that trader to build perspective on factors like
- The price at which you should buy or sell the stock
- Risk in trade
- What rewards can you get on trading
- Holding period of trading
Basically, it will give you a directional point of view on stock & other variables depend on it like entries, exit & risks involved in it.
It is also known as TA.
In technical analysis, we scan the opportunities first based on their current trend or market preference. It is a technique in which we find out who is getting maximum profit based on a collective group of market participants. Yes, it is based on so many assumptions according to market participants, Pattern formed on a chart because of it.
So the main thing Technical analysts do is to study those charts, those patterns & understand what message they are giving. But only understanding is not going to make us good so with understanding, develop they a point of view & plan strategy.
Most of the people or market participants choose technical analysis because it is a quick and easy way to make a huge profit but the fact is it the opposite of quick & easy.
It is true if you have done correctly will give you benefits but before you go deeper it is important to set some ground rules, what to expect & what you can achieve.
Trades- Technical analysis is used for short-term trading. So if you want to use this technique for long-term use make sure you’re using to know about entry & exit points to trade.
Return per trade- As we are using Technical analysis for the short term & for the smaller duration like few weeks or depends on the situation of that particular day of the market don’t expect more. It will give you a small but consistent profit according to your trade.
Holding period- The holding period of your trade can last from a few minutes to a few weeks but not longer than that according to your framework.
Risk- At the start, you will face loss because of some reasons, but by holding on to the trade you can make a profit too in the coming days.
Applications Of Technical Analysis
Once you understand the concept & process then you can apply it to any type of assets (equities, commodities, fixed income, foreign exchange & many more). It will remain the same for any assets.
Technical analysis is not about which stock is high (overvalue) or low (undervalue), It will depend on price & volume i.e. previous trading data of stocks so you can analyze & assume the future of that stock.
Four assumptions of Technical Analysis
Markets discount everything: Known & Unknown information in public which reflected in recent stock value.
How is more important: It is the next part of the first assumption. You need to understand how the price reacted.
Price always moves: To understand this assumption you need to know the concept of trend in the market. It is basic you must know. High price doesn’t rich in one night, there are phases that will help trend to establish.
There is repetition: It is human nature that when trends go upward we want to gain more profit similarly when you see a downtrend you try to avoid loss and maybe start selling before the stock hits the loss. So it is a cycle.
Indian stock market is open for 6 hours 15 minutes, i.e. from 9:15 am – 3:30 pm. There are so many analysts, traders are trading, so it makes it cluttered & difficult to track. That’s where OHLC helps you out.
OHLC means Open, High, Low & Close Price.
As you can imagine, daily four points displaying at the same time will create so much chaos, & difficult to understand. That’s where the candlesticks pattern comes in handy.
Candlesticks pattern is created to represent open, high, low & close points.
There are bullish candles, bearish candle patterns.
The green candle indicated bullish & red candle indicated bearish.
A Time Frame is the duration during which you choose to study a particular chart.
Some most used time frames are:
- Monthly charts
- Weekly charts
- Daily or end of the day chart
- Intraday chart i.e 30min, 15min, or 5min(Most popular)
Generally technical analysts start trading at 9:15 am which is ideal timing to start trading. As a trader you need to select the suitable time frame first.
List of patterns:
Single candlestick pattern:
Multiple Candlestick Pattern:
Why We Use Technical Analysis Tools:
Technical analysis tools are used to study technical charts and make assumptions accordingly to decide whether the trade will be in profit or loss.
There are many indicators to analyze technical charts. Which tools to use or mostly used depends on you completely. Which tools are suitable for you, which indicator is familiarized to you is the best combination tool for a separate individual.
Top Tools used for technical analysis are as follows:
Two Main Types: 1) Overlays
Oscillators have other types
- On Balance Value
- MACD (Moving Average Convergence Divergence)
- CCI (Commodity Channel Index)
- RSI (Relative Strength Index)
- SO (Stochastic Oscillator)
- MA (Moving Average)
- BB (Bollinger Band)
- AD ( Accumulation/Distribution Line)
- ADI ( Average Directional Index)
Above all examples usually I prefer indicators like Relative strength index, Stochastic oscillator, Moving average, Bollinger band, CCI indicators for Technical Analysis.
Fundamental Analysis or Technical Analysis?
Of course, there are pros & cons of technical analysis. There is no point to make an argument about which analysis is more accurate or best to practice. Both the techniques have their advantages & drawbacks.
So I think both the techniques are different and one cannot compare them instead learn both the technique in combination so you can get the benefits of each technique in combination.