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Technical analysis of the stocks


 
Technical analysis of stocks


Technical analysis is similar to simulation technique. Here, we make the analysis of the past data and on the basis of this analysis, we’ll forecast the price movement. Technical analysis can be used in the equity market, derivative market, commodity market, etc where the theory of supply and demand works. Technical analysis only talks about the trend and patterns. It ignores the other factors like economic growth, monetary policies, interest rates, etc.


Technical analysis involves analysis of a lot of charts, patterns, trend lines and other various indicators. In layman terms, it is just the identification of patterns in the market and following the trend in order to earn a good return. It is a scientific method that is based on a number of significant assumptions.


Some of the major assumptions are:


  • History always repeats. The trend of stocks always tends to repeat. The behavior of an investor or trader in most of the cases looks similar when they react to a price change in the certain direction. Here, the human nature works out. Illustration: If the market is bullish (trending upward), traders or investor becomes greedy and wants to buy the stocks even though the stocks are overvalued. And the same activities happen in a downtrend. Under bearish market, they want to sell the stocks even when it is undervalued and the price is unattractive.



  • The market discounts everything. It is also called the Dow theory. All the historical information price of the stocks are now available in the public domain. This information is discounted and reflected in the price of the stocks.



  • Price moves in trend. The activities of the investor and trader are guided by the market trend and accordingly the price moves. Once the direction of the trend is established, the price starts moving in the same direction.



Technical analysis is best used by the intra-day trader. This technique is mainly used for short-term trade. Long-term investment decisions are generally based on fundamental analysis.  Technical analysis can be used for earning a small and consistent return. Short term traders should not expect a high return. Instead, they should keep their eye on small and consistent profit.


Patterns in the market can be best viewed with the help of the stock's chart. This chart can even be used in long-term trades for identifying the correct entry and exit point. Technical analysis uses a number of tools like price and volume transformation, regression, moving averages, relative strength index, index and price correlation, standard deviation, stock cycles and numerous other charts like candlestick pattern, mountain chart, line break, etc.


Technical analysis also uses the various sorts of market indicators. Most of them are mathematical price transformation that includes up and down the volume. Also, it uses implied volatility, put-call ratio, bullish bear ratio, and many other tools.


Technical analysis is best when it is combined with the principles of the fundamental analysis. While doing so, technical analysis indicator helps to trace the entry and exit signals in the market.

Also read Fundamental analysis of the stock.


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