Technical Analysis

Study of demand and supply



5/9/20233 min read

Technical Analysis
Technical Analysis

Technical analysis is a method of evaluating securities by analysing statistical trends and market activity, such as price and volume data. It involves studying charts and other graphical representations of market data to identify patterns, trends, and potential trading opportunities.

The basic premise of technical analysis is that the historical performance of a security can be used to predict its future performance. Technical analysts believe that securities move in trends and that these trends can be identified and exploited through the use of technical analysis tools and techniques.

Some common technical analysis tools and techniques include moving averages, trend lines, chart patterns, and technical indicators, such as the relative strength index (RSI) or moving average convergence divergence (MACD).

Technical analysis is often used in conjunction with fundamental analysis, which involves analysing a company's financial and economic factors to determine its underlying value. Together, these two approaches can provide investors and traders with a more comprehensive view of security and help them make more informed investment decisions.

What are the 4 basic principles of technical analysis?

  1. Markets alternate between periods of expansion where prices trend and periods of contraction where prices consolidate.

  2. Trends are more likely than reversals.

  3. Trend ends in a rollover which is a gradual change in prices or climax which is an explosive change in prices.

  4. Momentum precedes price.

What are the 2 types of technical analysis?

The 2 main types of technical analysis are chart patterns based analysis and indicators based analysis.

What are the 3 rules of technical analysis?

The 3 main rules of technical analysis are as follows:

  1. The market discounts everything - This means that all the information of all market participants is reflected in the price at any moment of time.

  2. Prices move in trends - This is likely Newton’s law of inertia which states that anybody moves in the same direction unless acted upon by an external unbalanced force. This happens in the markets as well where prices keep moving in the same direction till they are forced to change by an event.

  3. Price action repeats itself - This is because human nature remains the same and the same actions related to greed and fear and repeated in markets over and over again.

What is RSI?

RSI stands for relative strength indicator and is used to make buy and sell decisions.

Usually the security is considered overbought when its RSI reaches above 70 and it is considered oversold when its RSI reaches below 30.

How do I choose a stop loss?

There are various ways to set a stop loss as follows:

  1. Percentage basis - You can set a loss at various levels depending on your risk appetite and the time frame that you are looking at. For example, intraday traders can set a stop loss at 1%, short term traders at 3-5% and long term traders at 8-10%.

  2. Price basis - You can set a loss at a price which is away from your purchase/sell price by Rs.1, 5 or 10 depending on your risk appetite and time frame.

What are moving averages?

Moving averages are one of the most common indicators used in technical analysis. They are simply the average of the last few time periods. For example, the 50 day moving average is the average of the closing price of the last 50 days. If the current market price is above the 50 day moving average it is considered to be bullish. If the price is below the 50 day moving average it is considered to be bearish for short term traders.

What is MACD level?

MACD stands for Moving Averages Convergence Divergence. It is calculated by subtracting a longer term moving average from a shorter term moving average. If the value is above 0 it is considered as bullish. If its value is below 0 it is considered as bearish.

What is technical analysis also called?

Technical analysis is also called charting.

What is the role of technical analysis?

Technical analysis helps to understand the supply and demand of a particular security.

What are the benefits of technical analysis?

Once you have narrowed down your security list based on fundamental factors you can use technical analysis to determine your entry, exit and stop loss.

Which tools can be used for technical analysis?

Below are some of the websites where you can access charts to do technical analysis: