When buying a new stock, we are worried about what will be the future price movements of the stock.
With the help of technical analysis, we can determine the future price movement of the stock by studying past data like price and volume.
In this video, let us discuss about technical analysis in detail:
What is Technical Analysis?
When it comes to analyzing the stock market, there are mainly two methods to do so i.e. technical analysis and fundamental analysis.
Fundamental analysis deals with doing the macroeconomic analysis, industry analysis, and then analyzing the financial statements of the company to determine the future performance of the company.
Whereas, technical analysis only deals with analyzing past data like prices and volume. In order to analyze past data, technical analysis provides us with a number of tools and indicators.
This whole process of analyzing prices and volume with technical tools and indicators is known as Technical Analysis.
These technical tools and indicators help us in determining the entry and exit points, as well as, if any reversal is going to take place.
There are certain assumptions on which technical analysis is based on:
First is that Prices move in trends.
Technical analysts believe that the price of any asset move in trends i.e. uptrend, downtrend and sideways in any timeframe, whether it is yearly, monthly, weekly, daily, and so on.
Next is that History repeats itself.
Technical analysts believe that the price movement of any asset is repetitive due to market psychology. They believe that the past price structure tends to repeat, and on this assumption, they trade.
The next assumption is that the market discount everything.
Technical analysts believe that most of the news prevailing in the market, of that particular company, is already discounted in the prices of that stock.
Next is, one should Confirm the Trend with Volume.
If the prices of the stock are moving in an upward or downward direction, then the volume should also be increasing.
If the volume is not increasing, then the ongoing trend is considered to be weak.
Next is, indices should Confirm Each Other.
To confirm that the ongoing trend is uptrend or downtrend, one should confirm it with other indices like industrial moving averages. In India, the trend of Nifty and Bank Nifty should confirm each other.
Next is, the Ongoing Trends persist, unless there is Reversal.
One of the important assumptions of technical analysis is that one should not consider a temporary change in the trend as a reversal, unless there is a clear indication.
Let us know the advantages of Technical Analysis:
- Technical analysis can be applied to any financial instruments, whether they are securities, commodities, currencies, etc.
- Technical analysis focuses on the previous price movements and thus helps us predicting future price movements.
- Technical analysis helps in analyzing the price action of the stock by studying the high, low, opening, and closing prices of the stock.
- It helps us in giving information about the stock over a period of time say yearly, monthly, weekly, daily, and so on.
- It helps us in studying certain levels of the stock prices from where it could reverse or continue its trend.
Now we will talk about the Limitations of Technical Analysis:
- Technical analysis is open to different interpretations. Different technicians analyze the charts, patterns, and indicators differently and end up with different conclusions.
- Personal biases are reflected in this analysis. For example, if a trader is bullish in stock, then a bullish bias will be reflected in his analysis.
- Sometimes the technical indicators give delayed and false signals. Thus, it is always better to confirm the signal given by one indicator with other price patterns or indicators.
We can conclude that with the help of technical analysis, traders can make better trading decisions like when to enter or exit the stock. They can develop a trading strategy, which will help them to reduce the losses which they make from trading.
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