3 Ways to approach Technical analysis
So, You heard of Technical Analysis. But do you know about Ways to approach Technical analysis? The extent of studies and approaches are becoming more vivid and widespread because of the continuous evolution of breed of traders. There are classical two systems to trading, (as most of you will be familiar with).
I. Technical Analysis & II. Fundamental Analysis.
Today, we are going to talk about Technical Analysis approach. Popular ways to approach Technical Analysis are as follows:
1. Chart Analysis
2. Pattern Recognition
3. Trend and Momentum Analysis
1. Chart Analysis:
The following are the charts used generally:
I. Line Charts and Bar Charts
II. Candle Charts
III. Elliott Wave Theory
IV. Point and Figure Charts
Candlesticks chart is the most popular among technical traders. It’s shows open, close, high & low of a script whether it is on any time frame viz 2 minute, 5 minutes, day, week. It is easy to get caught in lines and light. But if traded candlesticks with care around support and resistance of stocks can get you easy money. Afterward, indicators can be used to interpret the charts.
2. Pattern Recognition:
A chart pattern generates a certain development of the stock rate, though the interpretation demands a lot of experience from the analyst. A major distinction is made between
- Trend Continuation patterns and
- Trend Reversal patterns.
This is an art. There are many patterns that have different shapes and meanings. For example, Head & Shoulders pattern, Cup & handle formation, Double tops, Triangles.
In the starting a new trader need not know every pattern, Slowly and gradually a trader should learn to recognize patterns. Focus on key patterns and develop a trading plan around it.
3. Trend and Momentum Analysis:
Momentum refers to the speed at which prices are moving in a certain direction gradually. There are many oscillators and indicators in use like MACD, RSI etc. Traders learn to follow these indicators to interpret the next move of stock.
Trend phases play an important role because everybody wants to buy at dips
(start of an upward trend, end of a downward trend) and sell at a top (end of an upward trend, the start of a downward trend).
Typical mathematical trend following systems is Moving Averages. Moving Averages are rather simple instruments that serve as the basis for more sophisticated methods. If you plot in a line chart on the price axis averages of the previous days instead of the daily quotes you get a new line that resembles the original chart but is a little smoother and has a time lag.
The longer the average (i.e. the more data is used) the smoother the line and the bigger is the time lag.
And then there are those who enjoy the exotic and want to take things a little further. Anyone who has had anything to do with technical analysis would have heard of the names of W.D. Gann and R.N. Elliott. They were both analysts from the first half of the century who attempted to explain the apparently random movement of the markets through natural laws of rhythm and cycles. They both said that markets move in waves. Depending on the situation these waves could be expected to repeat with surprising accuracy.
While many throw insults at people who study the works of Gann and Elliott, it is interesting to note that many of Gann’s early ideas are in common usage and, unaware of the source, referred to as sound trading principles. For example, many commentators talk about buying on a dip. This was an approach developed initially by Charles Dow of Dow Jones fame and researched further by Gann to the point where he said that the safest place to buy was the first dip after a major bottom. He added that you should always wait for some form of confirmation first, otherwise that dip may just be the market resuming its bearish trend.