There are many schools exist for education of technical analysis of stocks. Technical analysis is the analysis of volume and price. It also deals with the correct use of these factors. It transforms the rules and bottom lines for profit and loss.
Technical analysis uses past data available in the form of charts and graphs. Tools such as different type of charts and trading volume are available. The strategy refers to the study of stock’s movements. Depending on the past behavior, we assume the future behavior of the stocks.
Introduction to Technical Analysis of Stocks
Technical analysis is utilised by huge number of experts. Major aspect of financial markets & mathematics and statistics and their techniques are fastest taking over. The fundamentals of technical analysis are easy to learn. Once you get the knowledge of technical analysis, you can easily understand how to do technical analysis of stocks.
In this blog, you will get the detailed understanding of “Technical Analysis of Stocks”.
Important of Technical Analysis
Many factors impact the movement of the stocks. These factors ratios of earnings to price and new products. The economic cycle is also a major factor. The analysis generally tracks the patterns that are repetitive. These patterns predict future trends too. Hence, the very first importance lies in predictions. Market forecasts help investors to do a smart trade. The acts of buying and selling happen on the basis of emotions of investors. Investors and traders behave in a certain manner under some conditions out of fear and greed. This pattern of behavior results in certain market conditions. Study of this pattern is important. It helps in knowing the possibilities in share market.
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Technical Analysis of Stocks
Technical Analysis says that the price of stocks gives all the required information, if you have sufficient knowledge of technical analysis then there is no need to do a deeper fundamental analysis of the company or industry. The way of analysis is based on the concept that market discount everything. This indicates that the actual price is the reflection of everything which is known to the market that could affect it.
To perform this kind of analysis, technical analysts make us of-
- Stock Chats (shows the price and volume trends)
- Moving Averages (Simple or Exponential)
- Other momentum indicators
One of the most important use of technical analysis of stock is that, with the help of historical price and data you can do back-testing to test your different trading strategies that are purely based on technical parameters.
Technical analysis is generally short-term in nature. It is usually preferred by traders who are interested in small period investments ranging from hours to even weeks. Now let’s take a look on methods of technical analysis.
[ Must Learn : How To Read Stock Charts ]
Methods of Technical Analysis of Stocks
To perform technical analysis, you need to assume that there is some relationship between historical chart patterns and future stock price. In the technical analysis you need to keep three things in your mind that are
- Stock prices follows trends
- Stock charts moves in a hypothetical pattern and it tend to repeat themselves
- Market prices throw back all the information about a stock
Method of technical analysis is based on these assumptions. In this method there are three main aspects that you must consider during the technical analysis.
#1 Stock Charts
Technical analysis is basically the prediction of the future movement of the stocks and it is based on the past performance of the stocks. Charts are the platform that include the historical data which help traders to interpret the story of a stock’s price action. The common types of charts are candlestick, line and bar charts.
Chart plot the prices with respect to time. The time interval of the chart can be specified through the settings. Candlestick chart is most commonly used by the trades. In this type of chart, the different time frame is available from 1 minute to daily, weekly and monthly. Depends on the different trading strategy, traders use the different time frames. To get detailed knowledge about stock charts and how to read them click here.!
#2 Moving Averages
Moving Averages are one of the oldest and most commonly used technical indicator. It is calculated to remove sharp, frequent fluctuations in a stock chart. Moving Averages are based on events that have already occurred in the market. There are 3 types of moving averages – simple, Weighted, or exponential and it is a lagging indicator.
Moving averages are used by most of the traders to find the trend, to know the reversal of the trend. It is also, useful for finding right stop loss.
#3 Technical Indicators
Technical indicators are mathematical calculations based on the price, volume. With the help of indicators traders can predict the future price movement. Indicators are divided into two main types, that are – Momentum Indicators and Price Indicators.
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Momentum Indicator measure the momentum of stocks. Generally, these indicators show overbought and overbought signals. These indicators are useful for traders to find right entry and right exits. These indicators are plotted below a price chart. Stochastic, Relative strength index (RSI) and commonly Channel Index (CCI) are widely used leading momentum indicators by the traders.
Indicators which are based on price and generates information like trends, support and resistance are price indicators. Technical indicator uses the same scale as prices are plotted over top of the price on a stock chart. Moving averages, Bollinger bands are widely used indicators.
combination of price and momentum indicators can help to generate more accurate result. Most of traders combine different price and momentum indicators as per their strategy and the right mix of technical indicators can give high probability signals.
Not only technical indicators, there are basic tools which also helps traders to generate converting signals that improve the probability of a direction price move. These tools are as follow.
Support and Resistance
By analyzing charts, traders can see certain price levels that tend to prevent prices from falling any further before rising back up again – it is known as support level. Price levels that continue to provide rejection and it cause price to fall back down again after testing – it is known as resistance levels. Support and resistance are a price level from where a trend can be expected to pause due to a concentration of demand.
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Volume measures the total number of shares traded for a specified period of time. It is used as a measure of interest that present significant price action. High volume indicates a breakout or breakdown accompanied by a sustaining trending activity that triggers a Breakout or breakdown accompanied by a sustaining trend in prices. Breakout result in higher trending prices and breakdowns result in lower trending prices.
[ More Info About Volume : What is Volume in Chart ? ]
Trends gives the current direction of Share prices. When stock price continues to rise higher, it is considered to be in an uptrend and vice versa for a downtrend. Uptrend indicates increases demand for shares, as buyers are willing to pay higher prices as supply decreases. By connecting the various high and low points on a chart, you can generate trend lines that pinpoint support/resistance and direction of stock prices. Also, Indicator such as moving averages help traders to identify the trend.
Benefits of technical analysis
- Technical analysis helps to predict the future movement of stock market.
- Historical chart patterns and other technical tools, can help to predict the major movement in the stock market.
- With the help of technical analysis, traders can predict the major fall that about the come in future.
Tracking the Trends
As said above, the biggest benefit of TA is a prediction. The main use as well advantage is forecasting market trends.
Right Timing Predictions
Right decision at the right time plays an important role in trading. With the help of charts, traders predict the right entry and exit points.
Affordable and Faster
The analytical tools help us to understand the future trends faster. We can study the movements of the market even in the case of a trend reversal. The technical analysis is quite affordable. Charting software is less expensive.
Large Multi-purpose Data
Tools or charts increase your access to the volume data. A brief chart or diagram will inform you a huge data. The analysis is useful in long term investment, swing trading, and short term trading. It gives lots of information like trends, resistance, and market volatility. It also shows you investor’s behavior and trader’s psychology.
Technical analysis helps traders to minimize the stop loss with the help of different strategies. For intraday trading, technical analysis is more relevant for professional traders as compare to fundamental analysis.
Reliability of Technical Analysis of Stocks
There is a vast scope to trade well with the smart use of charts. A skill of reading the charts can do wonders. The charts use the proven factors in innovative ways. Forecasting and right enter and exit timings are major.Early signals are also the main benefits. The modern day technical analysis is more reliable. It is smart due to the use of computers and internet.
Investors also need to learn how to use the analysis. Do not forget trend reversals while using the analysis. Only depending upon the charts is risky. Hence, a smart use of TA tools is wise. Using it as a supporting tool is good. Never make it a sole factor to trade is the best way.