Technical analysis is a way to forecast the market change of a share price on the basis of itspast results. Experts in technical analysis assume that,past fluctuations in a share price decide the future price of stocks.
Technical analysis is the study and use of price and volume charts and other technical indicators to predict future price movements of stocks. With proper and efficient use of various techniques, you can forecast future price movements almost accurately. The techniques used in technical analysis works well in all stocks, commodities, forex, and derivatives markets. Technical Analysis is basically used for short-term trading whereas Fundamental Analysis used for long-term investment.
Technical Analysis is broadly based on three assumptions :
Price discounts everything
Price moves in trends
History tends to repeat itself
Technical analysis is a forecast pattern for a security price movement that is normally capable of buying and selling in the stock market. It is the demand and supply of a security that is expressed in price movements.. The technical analysis applies primarily to price shifts.
General Steps to Technical Evaluation
Many technicians use Top Down Approach . Such analysis involves 3 steps
1 Braoad market analysis through major indices.
Sector analysis to identify strongest and weakest sectors of economy
Individual stock analysis to identify the strongest and weakest stocks within the sector.
The beauty of technical analysis lies in its versatalilty . You don’t need to be a CA or CPA to analyse a chart. Charts are charts. It does not matter if the time frame is 2 days or 2 years. It does not matter whether it is a stock ,forex or commodity. The technical principles of support , resistance , trend, trading range and other aspects can be applied to any chart.
The final step that is synthesised by a technical anlystis :
Strength of the current trend
Maturity of current trend
Risk to reward ratio of a new position
Potential entry levels for a new long / short position.
Here are some points that why technical analysis is important in the stock market:
Focus on price
Price movements usually precede fundamental developments. By focusing on price action , technicians autiomatically focus on the future.
2. Supply , demand and price action
Technicians use Open , High , Low , Close when analysing the price action of a security. There is information to be gleaned from each bit of information. Taken together , open , high , low and close reflect the forces of demand and supply.
3. Support / Resistance
Simple chart analysis can help identify support and resistance levels. These are usually marked by periods of congestion ( trading range ) where the prices move within a confined range for a long time period , telling us that forces of demand and supply are deadlocked. When the prices move above the trading range , it suggests that the demand is winning and if prices move below the trading range , it suggests supply is winning.
4 Pictorial price history
Charts are much easier to read than a table of numbers. With clear picture of charts , it is easy to identify the following :
Reactions prior to and after important levels.
Trading levels
Realtive strength of a stock versus overall market
Past and present volatility.
Assist with Entry Point
Technical Analysis can help with timing a proper entry and exit point. Fundamental Analysis tells u what to buy whereas Technical Analysis tells you when to buy a stock. Technical Analysis can help spot demand and supply levels as well as breakouts.
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