TABLE OF CONTENT
- Introduction to technical analysis
- What are technicals in the stock market
- Who invented technical analysis of stocks
- What are Dow's theories
- How do you learn technical analysis of stocks
- What are the limitations of technical analysis
- What are the assumptions in technical analysis
- How to do technical analysis
- What is the importance of technical analysis
- What are the different uses of technical analysis
- What are stock market charts
- What are trend lines
- What is the concept of support and resistance
- What is the reason for support and resistance to exist
- What is the importance of volume in technical analysis
- What are single candlestick patterns
- What are multiple candlesticks patterns
How to use technical analysis to make profit in markets
If you love taking signals from what others are doing, technical analysis may prove to be a good way to make profits in markets. By using technical indicators, technical analysis of stocks, commodities and currencies uses patterns in market data so as to identify trends and then make predictions. In this way, you know which security to buy, sell at what price. Read on to know more.
Introduction to technical analysis
Technical analysis refers to the use of price charts and other bits of market information. Technical charts are a key aspect of the study. There are also frameworks like Dow's theories that are all used to make investment decisions. Technical analysis basically tells you the direction of the security i.e. stock, index, currency or commodity. Along with direction, you also get an idea about entry and exit price for a successful trade. Tools like stock charts, candlestick charts and stock ticker are used by technical analysis experts.
Many investors, who are new to the markets, after opening an account starting learning about ways to make money. Technical analysis can come very handy for such investors to understand the basics and trade.
What are technicals in the stock market
Technical analysis as a methodology for forecasting the direction of prices. This is done through the study of past market data, primarily technicals like price and volume. Price is the rate at which the security traded at different points in time. Volume is the amount of trades that were done. There are breadth indicators, price based indicators, volume based indicators and mixing indicators.
Breadth indicators include advance–decline line, McClellan Oscillator and McClellan Summation Index. These are often used for technical analysis in intraday situations.
Price based indicators are average directional index, commodity channel index, MACD, momentum, relative strength index (RSI), relative vigour index (RVI), stochastic oscillator, trix and vortex indicator.
These indicators are seen in form of technical charts to understand the future direction. Once the market opens, data for technical changes. Do keep an eye on stock market timings. Once market is on, then technical analysis data like stock ticker will change every instant, and hence analysis will be dynamic in nature.
Who invented technical analysis of stocks
People say some aspects of technical analysis began to appear in Amsterdam-based merchant Joseph de la Vega's accounts of the Dutch financial markets in the 1700s. In the 1920-1930s, Richard W. Schabacker published several books on technical analysis.
Dow theory is based on the collected writings of Dow Jones co-founder and editor Charles Dow. He is said to have inspired the use and development of modern technical analysis at the end of the 1900s. Dow's theories are world-famous.
What are Dow's theories
The Dow theory on stock price movement is a form of technical analysis. It basically includes some aspects of sector rotation.
There are six basic tenets of Dow theory.
- The market has three movements - main movement, medium swing and short swing.
- The market trends have three phases - accumulation phase, a public participation or absorption phase, and a distribution phase.
- The stock market discounts all news.
- Stock market averages must confirm each other.
- Technical trends are confirmed by volume.
- Trends exist until definitive signals prove that they have ended.
How do you learn technical analysis of stocks
You can learn technical analysis by:
* Reading good books such as Technical Analysis of the Financial Markets, Technical Analysis Explained, Market Wizards, and Technical Analysis from A to Z etc.
* Reading articles and blogs on the Internet. Make it a point to read daily equity technical report. Study the Nifty technical chart regularly to see which patterns are being made.
* Do virtual trading to learn from mistakes. Avoid trading in penny stocks at first. They are high risk, high return game.
* Follow top technical analysts of the world such Gautam Shah, Ashwani Gujral, Sudarshan Sukhani, Anant Acharya, and Prakash Gaba .
What are the limitations of technical analysis
Technical analysis and technical charts are based on a theory. If the indicators give mixed signals, there is indecision. In such a scenario, one indicator could show a buy signal. At the same time, the other technical indicator could show a sell signal.
What are the assumptions in technical analysis
Technical markets experts believe that the security/stock price will move along an established trend and pattern. Yes, they think it will behave just as it had done in the past. We also admit that history does not repeat itself. If you are basis trades on some technical analysis in intraday, be prepared to witness something which has not happened in the past.
How to do technical analysis
Like any other field of study, technical analysis is about certain theories. These concepts serve to guide a technical analyst's approach to financial markets.
Some common concepts are:
* Breakout – whereby prices forcefully penetrate an area of prior support or resistance. If you are interested in trading in only indices, look for breakouts in Nifty technical chart.
* Chart pattern – distinctive pattern created by the movement of security on technical charts.
* Cycles – time targets for potential change in price action
* Elliott wave principle and the golden ratio - are used to calculate successive price movements and retracements
* Fibonacci ratios – used as a guide to determine support and resistance of a security
* Momentum – the rate of price change
* Resistance – a price level that may prompt selling activity
* Support – a price level that may prompt buying activity
What is the importance of technical analysis
Technical analysis is an indicator that helps the investor to know:
* When to enter or exit a trade
* What is price information
These information go into deciding how good or bad will be your trade. Many believe price data is the key to success in stock market investment. The supply and demand of stocks all depend upon technical analysis. Most of the technical information is updated dynamically when the market is open. Some of the stock charts are updated at the end of the day. Hence, keep an eye on stock market timings i.e. trade open and trade close.
What are the different uses of technical analysis
There is only one basic use of technical analysis - to get entry and exit information to make a successful trade. All the technical analysis and technical indicators are used to confirm other technical analysis tools. Technical analysis gives you very short term indicators of how a stock/index may move. Thus, it is fit for traders.
What are stock market charts
As you know, a price chart is a sequence of prices, which are plotted over a specific timeframe. Any security with price data over a period of time can be used to form technical charts. There are many different types of technical charts like candlestick chart, line chart, open & high low close chart and point & figure chart.
Read stock and commodity technical reports that come out everyday from brokerages like Nirmal Bang to gain usable information.
What are trend lines
Technical analysis is built on the assumption that prices trend. Hence, the use of trend lines is important for both trend identification and trend confirmation. A trend line is a straight line. It connects two or more price points and then extends into the future to act as a line of support or resistance. Trend lines are extremely useful for technical analysis of stocks.
What is the concept of support and resistance
The support and resistance are basically specific price points on a chart. These points are expected to attract maximum amount of buying or selling.
The support price in technical analysis is a price at which one can expect more buyers than sellers.
In the technical market, the resistance price is a price at which one can anticipate more sellers than buyers.
What is the reason for support and resistance to exist
Support price and resistance price tell you to buy or sell. These is a lot of hassle if you don't know when and where to buy. Thus, the reason for support and existence is only for guiding an investor to decide if the trade is right or wrong. Try to use support and resistance calls on well-known stocks, rather than immediately start with penny stocks. This is because penny stocks usually have low volumes.
What is the importance of volume in technical analysis
In the technical analysis world, volume measures the number of a stock's shares that are traded in a day or a period of time. Volume is very important because it confirms the previously-decided trend directions. Volume is a key input. Look at both price and volume when you study stock charts.
What are single candlestick patterns
Single means one. So, a single candlestick pattern means it is formed by just one candle. Thus, this trading signal or indicator is generated based on 1-day trading action. You can study tools like candlestick chart to understand the patterns.
Do remember to pay some attention to the length of the candle.
If the candles are short in length, assume that trading action was subdued.
What are multiple candlesticks patterns
When you analyze multiple candlestick patterns, you will need to study 2 or 3 candlesticks. This will be to identify a trading opportunity. Multiple candlestick patterns are used to gauge the trading opportunity.
Technical analysis of stocks with multiple candlestick patterns is better than single candlestick patterns.
