Technical analysis is a tool or process that uses market data to forecast securities' likely future price movement - such as a stock or currency pair.
The principle underlying technical analysis's validity is the idea that all market participants' aggregate activities - buying and selling - accurately represent all relevant information relative to a traded security and hence consistently assign a fair market value to the security.
What is Technical Analysis?
Technical analysis is a trading methodology used for assessing the investments made. It helps to determine the trading prospects by examining statistical trends collected from trading activity.
It assesses the value of a security on the basis of business results such as sales and earnings. It also provides a keen focus on the study of volume and price.
Understanding Technical Analysis
Technical analysis methods can be used to investigate how the demand and supply for specific securities affect price, volume, and implied volatility swings.
It is based on the notion that historical trading activity and price movements in the securities can be used as meaningful indications. When paired with appropriate trading or investment criteria, these indicators may aid in predicting market fluctuations in the future.
Using various charting tools, it is widely used to generate trade signals for short-term trading. They are, nevertheless, useful in improving the appraisal of a security's strength or weakness with respect to the greater market or its sector. Analysts use this information to help them enhance their overall assessment estimate.
Use of Technical Analysis
Professional analysts frequently employ technical analysis in conjunction with other sorts of studies.
Retail traders' decisions could only be based on price graphs and related statistics. Yet, equities analysts rarely rely just on technical or fundamental analysis. We can use technical analysis on any security with historical trading data.
Commodities, currencies, stocks, and other securities are examples of technical analysis. Technical analysis is often used in commodity and FX markets because traders are concerned with price movement in the near term.
Technical Stock Market Charts
A price chart, as you may know, is a series of prices plotted over a given timeframe. Technical charts can be created using any security that has price data over time.
Technical charts are classified into several varieties, including candlestick charts, line charts, open & high-low-close charts, and point & figure charts.
Indicators of Technical Analysis
More than a hundred patterns and indicators for trading in stock market technical analysis have been established by researchers from various businesses. Technical analysts have created a variety of trading methods to assist them in forecasting and trading price fluctuations.
These indicators are designed to identify current market trends, such as areas of support and resistance. Others are concerned with determining the strength of a trend.
Components of Trend Lines
Below mentioned are the key component of trend lines-
a) Trend Lines
The assumption underlying technical analysis is that prices trend. As a result, the employment of trend lines is critical for trend identification as well as trend confirmation.
A straight line is a trend line. It joins two or more price points and then continues into the future to serve as a support or resistance line. Trend lines are particularly beneficial for stock technical analysis.
b) Support and Resistance
Support and resistance are essentially price marks on a chart. These points are predicted to generate the greatest amount of buying or selling.
In technical analysis, the support price is the price at which there are more buyers than sellers. In the technical market, the resistance price is the price at which more sellers are expected than buyers.
c) Volume
Volume in technical stock analysis refers to the number of shares of a stock that are traded on a certain day or period of time.
Volume is critical since it validates previously determined trend directions. Volume is an important input. While studying stock charts, consider both price and volume.
Advantages and Limitations of Technical Analysis
Pros of Technical Analysis | Cons of Technical Analysis |
It helps identify trends in the market, i.e. whether they are bullish, bearish, etc. | It can be subjective and may give conflicting signals. |
It provides entry and exit signals, which lets an investor identify when to enter and exit trades. | Since technical analysis is based only on price and volume data, it may not consider fundamental factors. |
It helps in managing risk, which ultimately limits the losses. | It may not work in all types of market conditions and may give false signals. |
Since technical analysis is based on objective data and mathematical calculations, it provides a clear approach. | For using technical analysis, it may require some skill and experience. New traders may find it difficult to use. |
