What is Technical Analysis?
In simple words, technical analysis can be defined as predicting the future price of a stock by looking at the past trends of similar stocks prevailing in the market. This includes analysis of the market data, price analysis, and the volume traded. The principles that govern the technical analysis are made by observing the stock market trends for hundreds of years. Technical analysts don’t look at the intrinsic value (the true value of the stock based on the assets owned by the company) of the stock, they look at the prevailing market factors determining the overall market sentiment. Another factor they look at is the supply and demand factors prevailing in the market. After careful analysis, they extrapolate these past and present trends to stretch them for future predictions.
Technical analysis depends mainly on mathematical calculations to reach these trend conclusions. Let’s have a look at a very simple example of how technical analysis helps stock marketers make key decisions regarding their investments.
Let us assume that Mr. A wants to buy a stock XYZ of company D. He talks to his broker about his interest in that particular stock. He then asks him for the advice. The broker looks at all the past trends for the stock XYZ and tries to establish patterns set by the stock. For example, he’ll look at the six-month performance in past, for instance how the price of stock started going down from January to June and in June it hits the bottom. After that, it started rising again and swelled to its maximum price in December. He’ll ask Mr. A to buy the stock at the end of June or at the start of July. He’ll also recommend Mr. A to sell the stock in December.
That was a typical example of stock technical analysis. The stock broker just looked at the stock’s price and its trends in the past. It gave him a pattern that particular stock has been following and helped him in advising his customer. Technical analysis of this sort is for long term investment. There are, however, very short trends analyzed as well. These trends may be of months, days, hours or seconds. Technical analysis can be done for any set of time. Tighter the timelines, tougher it will get for the analysts to predict with more reasonability and accuracy.
Technical Analysis is used by Traders and investors worldwide for future predictions and for historical references. History repeats itself and this is what technical analysts believe. They look for chart patterns and make predictions based on technical tools. As the name suggests Technical analysis is an analysis of a security by means of some technical reasoning or tools.
Few of the tools are
- Average Directional Movement (ADX)
- Accumulation/Distribution (AD)
- Average True Range (ATR)
- Relative Strength Index
- Stochastic Oscillator
There are thousands of tools out there and traders are using them in millions of ways. A novice trader actually makes his first mistake here. He thinks more is better. He tries to learn each and every technical tool and hops on from one tool to another in search of a sure shot tool for success in trading. If you are in this position, let me make it clear.“There is no sure-shot tool and more is not good surely”. Like weather prediction, you can set probabilities, but you can never be 100% sure what will happen in future.
There are lots of online tutorials, reading materials which can give you a lot of information. Going thru all those without any guidance can be painful and you might feel lost and de-motivated after some time.
To cut the learning curve short, I would recommend that find a mentor or attend a professional trading course. You might feel that why should I pay when I can get all the information for free?
Trading is not like a simple math equation (2+2 =4), It’s an art and your tool is technical analysis. You might get the tools online, but you can’t be an artist without a guru. Self-experience is also a guru, but it would take lots of your time and effort.
I would recommend a book for learning technical analysis for both novice and experienced traders. It helped me a lot in becoming a professional Technical analyst. It will surely help you too. The link is given at bottom of the article.
Please buy it and feel like you are buying an asset. It is a small investment for your bright future.