Technical analysis is the study of market action primarily through the use of charts for the purpose of forecasting future price trends to evaluate investments and identify trading possibility.
Technical analyst also known as chart analyst or price action analyst.
Topic to cover:
- MARKET ANALYSIS
- HOW TECHNICAL ANALYSIS WORKS
- TECHNICAL ANALYSIS METHODS AND TOOLS
- ASSUMPTIONS OF TECHNICAL ANALYSIS;
- WHY TECHNICAL ANALYSIS FAILS;
- HOW TECHNIcAL ANALYSIS IS USED;
- THERE ARE FIVE CORE STEPS TO GETTING STARTED WITH TECHNICAL ANALYSIS
- TIPS AND RISK FACTORS
- FINAL WORDS
- TECHNICAL ANALYSIS BOOK
AIMS OF ANALYSIS
In chart analysis, we assume that past trading activity and price change of security can predict the future price movement of the security when paired with appropriate trading or investing rules.
Above all chart analysis is the forecasting of future financial price movements based on an examination of past price movements.
In technical analysis, we try to understand the market sentiment behind price trends by looking for patterns and trends rather than analyzing securities fundamental attributes.
Chart analysis can be employed in all sectors such as stocks, commodities, currency, bonds, stocks, futures, and options or any tradable instruments where the price is influenced by the forces of supply and demand.
Because the fundamentals of technical analysis is the same for all the trading platform.
But the fundamentals of commodities are different from stocks and currencies. It is the main problem of FA.
FA requires complete political, economic details of the particular country but a single trader can employ only a handful of data at a particular time frame. Therefore TA has an advantage over FA.
Money management is essential in trading. Therefore, you should risk 1 or 2 percentage of his entire account balance on every trade. Before buy or sell, you should calculate the risk-reward ratio.
Market is highly volatile and it is very difficult to predict the move of market before hand. So you should always apply a strict stop-loss before taking any trade.
In trading, quality of every trade matters more than quantity of trade. So don’t take trades blindly. Otherwise you end up with huge loss.
Trading is 70 percentage of the psychology of the traders and 30 percentage of technical stuff therefore you should consider them seriously.
METHOD OF ANALYSIS
Traders can analyse the trade by 2 methods. They are——
Firstly, TA (Technical analysis);
Secondly, FA (Fundamental analysis);
HOW TECHNICAL ANALYSIS WORKS?
(i) Chart analysis tries to capture market psychology and sentiment by analyzing price action, trends, and chart patterns to clarify possible trading opportunities.
(ii) Contrary to fundamental analysis, price action analysts do not necessarily care much about the companies of the stocks they trade or their profitability. But chart analysis has a very low success rate because it is quick and easy.
(iii) Some believe technical analysis is the best way to trade, while others claim it is misguided and lacks a theoretical basis. In reality is only for short-term trading or day trading.
TECHNICAL ANALYSIS METHODS AND TOOLS
- The main types of chart used in chart analysis is——
- BAR CHART;
- RENCO CHART;
- POINT AND FIGURE CHART;
- LINE CHART;
The most important components of charts are ——-
Open, low, high, & close.
The overall market sentiment (bullish or bearish) for either a good or bad news.
Trends could be upward or downward.
Market remains in a range when the current market price trades between a certain support and resistance zone.
SUPPORT AND RESISTANCE
The line forms connecting two or more major price action zone of the charts. In other words, support forms below the current market price and the price can’t (probably or traders perception) goes down below the support line.
Similarly, resistance forms above the current market price and the current market price can’t go up above the resistance level.
In conclusion, the current market price near the support line indicates a buy signal and the current market price near the resistance line indicates the sell signal.
The line forming by connecting two or more candle’s body or wick either in an uptrend or downtrend.
INDICATORS BASED ANALYSIS
- Classes of Indicators: Lagging leading indicators.
- Trend indicators
- Momentum indicator
- Volatility indicators
|PRICE||VOLUME||Changes in market|
|INCREASE||INCREASE||LONG BUILT UP|
|DECREASE||INCREASE||SHORT BUILT UP|
|INCREASE||DECREASE||SHORT COVER UP|
|DECREASE||DECREASE||LONG COVER UP|
MULTIPLE TIMEFRAME ANALYSIS
How multiple timeframe combines: If you see a uptrend in a 5 min chart then go and confirm in 1 hour, 2 hour chart for further confirmation and vice versa.
TRADING WITH TA
TRADING METHOD: Mechanical vs. Discretionary;
DISCRETIONARY TRADING SETUP—–
Firstly, With trend
Technical analysis first introduced by Charles Dow in the late 1800s. Now known as Dow Theory. chart analysis is now far more developed because of years of research.
Charles Dow released a series of editorials in which he includes two basic assumptions that later becomes the framework of price action analysis. These are—-
(i) Market are efficient with values representing factors that influence a securities price, but
(ii) Random market price movements appear to move in identifiable patterns and trends that tend to repeat over time.
ASSUMPTIONS OF TECHNICAL ANALYSIS
In technical analysis “how” is more important than “why”.
1.Market discounts everything
Firstly, in chart analysis, we assume that all known information available in the public domain (known /unknown) is reflected in the recent price action.
2.Price moves in trends
Secondly, the concept of trend is the foundation of the trend. In technical analysis assume that price trends to sustain and price pattern tends to repeat over time. In short all major moves in the market is the outcome of the trend.
3.History tends to repeat itself
As basic human psychology is the same so the market participants consistently react to price movements in a remarkably similar way, each and every time the price moves in a certain direction.
HOW TECHNICAL ANALYSIS IS USED?
Technical analysis is about probability and likelihood, not guarantees but chart analysis can provide price predictions very accurately.
By chart analysis. we can forecast the price movement of virtually any tradable instrument that is subject to forces of supply and demand including stocks, bonds, commodities, futures, currency pairs.
THERE ARE FIVE CORE STEPS TO GETTING STARTED WITH TECHNICAL ANALYSIS:
- Identify a price action analysis strategy or develop a trading system.
- Identify tradable securities that fit with the technical strategy
- Find the right brokerage account for executing the trades
- Select an interface to track and monitor trades.
- Identify any other applications that may be needed to implement the strategy.
WHY TECHNICAL ANALYSIS FAILS?
Chart analysis is subjective as a result it is never possible fo you to verify all the information completely. So we largely depend on pattern recognition, trends line, support and resistance level, over ought and oversold indicators, wave counts as a whole.
All of these tools rarely agree with one another, and most of the time contradict one another. So we end up talking loosing trade. So we have to make a strategy of using indicators, volumes, price patterns as a whole.
TIPS AND RISK FACTORS
Trading is challenging, so it’s important to do your homework. These are:
- For instance, understand the underlying logic behind price action analysis.
- Backtesting trading strategy to clarify how that would have performed in the past.
- Practicing trading in a demo account before committing real capital.
You should be aware of the limitation of the chart analysis so that you can avoid costly failures and surprise;
- Be thoughtful and flexible about the scalability and future requirements.
- Try to evaluate the features of the trading accounts by testing the free features.
- Start small in the beginning and expanding as you gain experience.
- Have realistic expectation.
9 BEST TECHNICAL ANALYSIS BOOK
These are the best books to learn chart Analysis of stocks ——
- “Getting started in Technical Analysis” by Jack Schwager.
- “Technical Analysis Explained” by Martin Pring.
- “How to Make Money in Stocks“ by William o” Nail.
- “Technical analysis from A to Z” by Steven B. Achelis.
- “A Complete Guide to Volume Price Analysis” by Anna Coulling.
- “Technical Analysis of the Financial Markets” by John Murphy.
- “Japanese Candlestick Charting Techniques“ by Steve Nison.
- “Encyclopedia of chart patterns” by Thomas Bulkowski.
- “Technical Analysis Using Multiple Time frames” by Brian Shannon.
Many investors use both fundamental analysis and technical analysis during making an investment decision. They use fundamental study to find a strong sector or company likewise chart analysis to find the right entry and exit points to maximize profit.
Thus price action analysis is helpful to fill in the gap of knowledge. By developing an understanding of price action, traders and investors certainly improve their long term Risk-adjusted returns.
But practice these techniques properly is important before committing real capital to avoid costly mistakes.
Yes, it is useful only when applied with proper knowledge and skill.
Well, there are various rumors in the market regarding TA. But in my opinion, it is anything but NONSENSE. It is easy and quick. IF applied properly you can earn a good portion of money.
Many believe that FA is better while others believe that TA is better.
But both re largely different sectors of excellence. So one can’t really compare FA with TA. One can earn maximum profit when applied both simultaneously
The investors and traders use technical analysis for trade and investment are technical analysts.