Technical analysis concerns activity in the financial market. For a technician, it is the fluctuations in price that are important. These fluctuations appear on the graph day after day, week after week, or over some other fixed period, and are represented in charts. Hence the name chart analysis.
A chartist only observes a price chart. On the other hand, a technical analyst studies not only particular price charts but also technical indications produced by the movements of price.
The key point of technical analysis is to look at current buying and selling pressure of a commodities, stocks of a company, indexes, futures and other objects for a trade.
To predict price movements in the future, technical analysis consists of plotting the stock data – such as price, volume and open interest – on a chart and applying patterns and indicators to the chart. The analysis of price data can be done using a shorter time horizon (intraday: 1-minute, 5-minute, 10-minute, 15-minute, 30-minute or hourly; daily; weekly; monthly) and, at the same time, can encompass a longer time horizon.
There are two types of anlaysis that help us to evaluate investment options on the securities market: fundamental analysis versus technical analysis. On one hand, you can use just technical information that neglects fundamentals and focuses on real price fluctuations. On the other hand, you can use just fundamental information, such as the company’s financial and non-financial characteristics.
The Basis of Technical Analysis:
Charles Dow’s ideas from earlier in the article purport to explain why it can be useful to look for information about price behaviour in technical analysis: price discounts everything; price movements are not entirely random Price history repeats itself.
Everything is discounted by price:
The technical analyst believes that at any given time, the price reflects everything we know about the price – the market-implied set of facts that might have an effect upon it. The market price encapsulates everything; it is the consensus of everyone who knows everything relevant, from traders to investors, financial advisers, discount analysts, sales-men/women, market strategists, technical analysts, fundamental analysts, and so on. It’s suicidal to disagree with such a crowd of erudite cerebral firepower with such impressive résumés. Technical analysis reads the price and the historical track record of the price action, and predicts that the price will behave the same in the future under similar conditions.
Price movements are not totally random:
Technical analysis depends on a leading indicator system. Nearly all technicians will agree that prices have taught us one very important fact: over hundreds of years and millions of prices the trend is the friend of the investor. We would be hard pressed to use technical analysis to make a few bucks if the markets were completely random and unpredictable. The technician believes that it is possible to spot trends, to trade or invest on their basis and garner some profit as those trends create themselves. Technical analysis can be used to reveal both short- and long-term trends spanning any number of time frames.
History tends to repeat itself
The price of any financial instrument that can be traded – and that’s pretty much all of them – is a matter of balance between supply factors and demand factors. The eternal goal of analysis is to predict the direction of future price change. Fundamentalists want to know why the price moves The ‘why’ question is far too imprecise for technologists, who commonly assert the strongest reasons you can ever dream of.
Technical Analysis: The basic assumptions
• The actual market price is a function of supply and demand. • Price dynamics often indicate a trend. • An identified price pattern may be reversed or change abruptly. • By analysing graphs and diagrams, we can project changes in the balance between supply and demand. • Repetitive price dynamics are typical.
Strengths of Technical Analysis
Not Limited to Stocks
Technical analysis works anywhere. You can use it in every kind of financial instrument, such as stocks, futures and commodity markets, fixed-income securities, currency and others.
Think About Price
When there are fundamental changes, there are price changes. Techs focus on the future by ignoring anything but price movements It makes sense to watch for price changes immediately after, and right before, following the market. Most of the time, change is a stealthy operator. For as much as the market likes to suddenly and violently react, significant changes come signposted. A period of accumulation should be seen as a harbinger of an impending advance, and a distribution period as an omen of an impending crumble.
Support and Resistance
One way we do that is by drawing up support and resistance levels. Trading ranges reflect a stalemate in the balance between supply and demand, since prices move within them for considerable periods of time. When prices move outside the range, supply and demand start to shift.
Price History in Pictures
Finally price graph provides the most use el data that would be easier to understand the historical rose and how dont the price of secrutis were changing in the passage of time .Every chart is simpler to understand than table of numers.Generally volume bars are displayed at bottom of stock chart.
Assistance With the Point of Entry
Technical analysis helps to find the correct entry point.
Technical analysis determines a necessary step in the performance of buying, namely the timings. In contrast, fundamental analysis delivers the conclusive decision on what should be bought.
When is the right timing? This is the major importance of technical analysis because it helps detect demands (support) and supplies (resistance) army and whether or not they can be able to break out of there echelon.
A breakout over the resistance can reveal a great return for those watching, just like buying items near the support levels can enable to buy items at relatively low prices.
Weaknesses of Technical Analysis
Expert Bias
Technical analysis is not a science – fundamental or otherwise. It’s subjective and the analysis you interpret is open to your biases. Pandering to those biases is why it’s really important to be cognisant of your biases when examining a chart. If your analyst is also a bull, the play-by-play will be just that, too.
Trading Regret
As a beginner learning technical analysis, you start seeing all kinds of patterns and signs emerge. Not all signals are reliable. Example: When the neckline of a head and shoulders pattern gets broken, a sell signal is formed. It’s a rule, but it’s not foolproof and is subject to other variables like volume and motion. What may work for one stock might not work for another – for Infosys you might find that a 50-day moving average works well in finding support and resistance, for Reliance it might be 70. While many of the samples of technical analysis are universal, every security will also have its own quirks.
Additionally, TA is helpful in managing risk.
You will need self-control to get out of a trade when it goes against you. And only Technical Analysis can provide that. It is very easy to become pigheaded about a trade once you have entered into it on the wrong side.
Risk management is more crucial than profit maximization!
It is asymmetric because zero and infinite are asymmetric. Why does that matter? All of us have virtually no cashflow, but thanks to tens of thousands of stocks we can play forever. Miss one today and there will be 100,000+ chances to make up tomorrow. Will we have 100,000+ chances to re-capitalise if we blow our capital? No, we won’t. We will for sure miss out on chances, too.
Conclusions
The Pareto principle, in turn, applies to technical analysis: 80 per cent of the market’s moves, it claims, are psychological, while only 20 per cent are logical. Yet, fundamentalists of the species hold the opposite view: for them, 80 per cent of the market’s moves are logical and only 20 per cent are psychological. There might be some debate about whether psychological and intellectual signifies are synonymous, but there is no room for dispute about the value of a security based on its current price. It holds for everyone to see, and no shadow of a doubt could be cast on it. Among professionals, at any rate, the value the market gives to the security is the product of the combined wisdom of all those playing the game.