The term technical analysis is the most talked about term in the stock market, yet very few are able to successfully harness the benefits of technical analysis. What is Technical Analysis? What is the difference between technical analysis and fundamental analysis? How to start technical analysis? Which technical analysis software to use? What technical analysis indicators to use? These are some of the various questions that erupt in every beginner’s minds.
What is Technical Analysis?
Technical analysis can be defined as graphical and statistical analysis of historic data, primarily that of price and volume to draw inferences thereof, for predicting the future trend and movement of prices. In simple terms technical analysis means, an analysis to extrapolate the future by interpreting the past and the present with a basic assumption that history repeats itself.
What are the major differences between technical analysis and fundamental analysis?
|Particulars||Technical Analysis||Fundamental Analysis|
|Inputs||Price, Volume, Open Interest etc in the form of charts & graphs||Price/Earnings Ratio, Price/Book Ratio, Price/Sales Ratio, Return on Capital, Debt/Equity Ratio, Revenue & Profit growth percentages etc of past and current periods|
|Time Horizon||Used for short to medium term||Used for long term|
|Assumptions||Market Price discounts everything in the short term, History repeats itself and Prices move in trends||Current market price does not reflect true worth of the company, Market price will discount everything in the long term, History does not repeat in an identical manner|
How to start technical analysis?
Starting technical analysis is very simple and free to start. The BSE and NSE provide free intraday & historical end of day charts for long periods of time. These charts show simple line graph which when analysed, help one to know the basic trend and understand the main direction of the market – either up or down which works a sufficient and fantastic starting point.
Moving averages are used to smooth the price fluctuations on the chart so that a formula based buy and sell can be formulated for quick and unbiased trading signals. There are many other complex strategies and tools but statistical evidence shows simple things like moving averages have worked consistently on all time frames across all securities for superior profits in the long term.
Which Technical Analysis software to use?
Now a days due to technology and free availability of data, many free software or websites are available which provide end of day charts for free. Software is not important, any simple charting software is sufficient, but how to interpret the price action is of utmost importance.
What Technical Analysis indicators mean and how to use them?
Technical Analysis indicators are mathematical calculations based on price and time as principal inputs. As a general rule the indicator suggests likely market tops and bottoms for the medium to short term. There are many successful traders who do not use any indicator citing they are just the derivatives of the price and focusing on them dilutes the main focus which is price. However some others have still carved out successful trading strategies based on indicators like MADC, ROC, RSI, Stochastic etc. What suits to a particular trader may not be suitable to other. Each one has to find his or her own indicator that works well. As a rule, no indicator is bad or good, the real secret, is to stick with it even during times of whipsaw losses because the real big profits come when people give up taking small small losses. Technical analysis and its indicators can be used for both intraday trading and positional trading. The selection of the indicators will often depend on the target length of the trade being initiated.
5 biggest secrets for making money using technical analysis:
- Go with the major trend
- Do not bet on trend reversals but bet for trend continuations
- Stay away from sideways or correcting markets
- Scan many markets across securities to identify right tradable setups
- Trade only in highly liquid stocks and securities
Anyone who believes that price depicts the human action at the aggregate, and, whereas in price, a galaxy of convergences happening in the form of greed, fear, desire, deceit, naiveté, earning estimates, gullibility, fund managers activities, supply and demand of stock, monetary policies, trap settings, manipulations, arrogance, human egos, conspiracy, fraud, phases of the moon, sun spots, economic cycles, public moods and the indomitable human need to be right, then Technical analysis will surely be a great money making tool in the hands of the person who uses it with conviction. Get this conviction right, everything else will fall in line.
Technical Analysis reference books:
Technical Analysis of Stock Trends by Edwards & Magee
One must also refer the basic guidelines on how to succeed while trading in the stock markets available on the Indian Trading League website.
SAMCO, one of India’s leading discount brokerages is helping intraday and positional traders by providing free charts both Intraday and end of day charts along with major technical analysis indicators on the SAMCO Trading Terminal – SAMCO Trader.
In case you don’t have a SAMCO account yet, open a trading account with SAMCO for free today.