In this article, we will discuss
- What is Technical Analysis?
- Basics of Technical Analysis
- Advance Level of Technical Analysis
What is Technical Analysis?Traders use this analysis method to identify trading opportunities in the market. They use information like price data, volume data, statistical trends, graphs etc., to make assumptions about the behaviour of a stock in future. In simpler words, it is a historical analysis that leverages the past behaviour of a security or stock to predict its future price movements. Traders can use technical analysis for not just shares but any security that has a trading history. You can use it to analyse shares, commodities, currencies, fixed income and other securities as well.
Basics of Technical AnalysisThe very basics of this analysis include charts and technical indicators that you can use to interpret your results. Just like there can be different types of charts, there are also different indicators. Let’s take a look at them in detail.
- Depending upon the choice and strategies of a trader, they may choose a time frame that is more suitable to them.
- Intraday traders mostly use 5-minute or 15-minute charts for their market analysis as they are short-frame charts.
- Traders who wish to hold their position overnight or for longer durations would be more inclined to consider daily, weekly or other charts.
- Candlesticks are the most commonly used chart types among traders.
- Candlestick patterns and bar graphs represent a more detailed movement of a commodity because they show its opening, closing, highs and lows with every candlestick or bar.
- With the use of charts, various researchers have also developed several charting patterns that help traders identify entry and exit points while doing market analysis.
- Technical Indicators
- Moving Averages
- You sum up the data points of a security and then divide it by the total number of data points it has to get an average.
- Relative Strength Index (RSI)
- It is an indicator of the oscillator category and is expressed as a value between 0 - 100.
- When the indicator range is above 70, the market is said to be overbought and indicates a temporary near end to the short-term gains of a security. It means the price of the stock is approaching a declining trend.
- Similarly, if the indicator has a range under 30, the market is oversold. It means the short-term price decline in the security is ending for the time being and may shoot up for the short term in the near future.
Advance Level of Technical AnalysisAn advanced level of technical analysis is a systematic approach to incorporating multiple technical indicators, theories and chart patterns. It helps to identify the future price movement of a security. It either combines multiple tools or uses a complex tool to find good trading opportunity in the market. Hereon, we have discussed some of the most commonly used advanced technical tools to manage risk, maximise returns, and properly allocate assets to create a diversified portfolio.
- Ichimoku cloud
- When the cloud is below the price point, it is a bullish signal.
- It is a bearish signal when the price point is below the cloud.
- When the price is in the middle of the cloud, it is a ranging trend.
- When Tenkan Sen crosses Kijun-Sen from below to above, it is a buy signal. When Tenkan Sen crosses it from above to below or goes on a downside trend, it is a sell signal.
- Bollinger bands
- It helps you find sharp, short-term price movements so that you can identify potential entry and exit points for your trade.
- Bollinger bands consist of a middle band which is a moving average, and an upper and lower band.
- The upper and lower band are set above and below the moving average line as per the number of standard deviations in the price.
- If you compare the position of stocks relative to the bands, it will help you answer the question if the stock price is relatively low or relatively high.
- The width of the band is an indicator of its volatility. If the width is narrow, it means the level of volatility is low and vice versa.
- Bands are formed on price charts to identify patterns, such as Double Bottoms, Classic M Top, Three Pushes to High and more.
- Elliott wave theory
- It is based on a repetitive eight-wave pattern, where the first five waves are usually the impulsive waves, which make up a large impulsive wave. This large wave is then followed by a three-wave pattern indicating a correction trend.
- You must remember that Wave 2 never goes below the starting point of Wave 1. If it does, then you have spotted a wrong Wave 1.
- If there are three impulse waves, Wave 3 will never be the shortest of the three.
- Finally, Wave 4 never goes below the final point of Wave 1. If so, it will continue to be treated as part of Wave 3 instead of Wave 4.
ConclusionTechnical Analysis is a complex analysis skill but is also very crucial in identifying the right opportunities at the right time. Traders can leverage different analysis tools based on their preferences and understanding to maximise their returns. You must remember that the entire concept of technical analysis is based on the past performance of a stock. However, as harsh as it may sound, past performance is never a comprehensive indicator of the future performance of a stock. It is only a guide traders use to form their analyses and predictions, but no technical analysis tool is entirely flawless. Hence, constant re-evaluation is equally important to validate the signals of a tool.
What is an oscillator?
How is technical analysis different from fundamental analysis?
What are some limitations of using technical analysis?
If the technical analysis is not entirely accurate, why do traders still use it?
Which is the most accurate technical indicator?
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