Whether your answer was yes or no it makes sense for you to know about the technical analysis in Stock Market.
The Stock Analysis is of two types:
Fundamental Analysis
It is done by the use of fundamental information of the company like checking the Balance Sheet, Profit, and Loss, Cash Flow, etc. It is concerned with “Why” the price is rather than what it is.
Technical Analysis
Technical Analysis
It is done by ignoring the fundamentals and focusing on the actual price movements. It is concerned with “What” rather than why the price is.
Basic Assumptions of Technical Analysis
Price Discounts Everything
Basic Assumptions of Technical Analysis
Price Discounts Everything
The Technical Analysis focuses on the actual price and the current price of the security. It assumes that the total price (Actual and Current) of securities is the total sum of all possible material information which would affect the price of a company.
Price Moves in Trend
Price Moves in Trend
The price follows a cycle of market emotions. Once a trend has been established in the market, the future price direction is more likely to be that particular direction of the trend.
A trend in the Stock Market can be understood by the basic demand and supply relation.
When the demand is greater than supply then the stock price increases and it’s called an uptrend when there are higher tops and higher bottoms in the stock chart.
When the demand is less than supply then the stock price decreased and it’s called a downtrend when there are lower tops and lower bottoms in the stock chart.
When the market is range bound and the tops and bottoms are formed at the same level it’s called a sideways trend.
For doing the technical analysis we take the help of different types of charts like Line chart (Used to see the trend), Bar Chart (Used for Price Action analysis), Candle Stick (Tells about the Market Psychology and is most widely used)
Two Terms that are Frequently Used in Technical Analysis
Support
It is a price level where a downtrend is expected to pause due to a pressure of demand or buying interest. It can be related to the support that we give to any object so that it does not fall.
Resistance
Resistance
It is the price level above which an uptrend is not expected to rise. It can be compared to the hindrance that we put to stop something from moving. This is a price point at which there are more sellers than buyers in the market for the particular stock.
Types of Trading Perspectives and their Time Frames
Intraday Trading
It is a type of trading in which the trader holds trade for few minutes to few hours but not overnight. For intraday, the traders usually set the chart to a 15-minute time frame. In intraday, there is also a term called scalping in which the trades are held for a few seconds to a few minutes.
Positional Trading
Positional Trading
In positional trading, the traders hold the trades overnight. In positional trading, there are two more categories namely Intermediate( traders hold trades for few weeks to few months but less than 1 year) and Swing Trading(traders hold trades for few days to few weeks). For positional trading, the daily chart is chosen on a 1-day time frame. Swing traders sometimes use the 1-hour chart for their reference as well.
Long-term Investment
Long-term Investment
In this type, the traders hold their trades for more than 1 year. The traders in these categories usually look at the weekly charts for their reference.
How to Choose the Stock?
How to Choose the Stock?
For a long-term perspective, you should divide your capital into 4-5 equal parts then choose a fundamentally strong stock.
For a short term perspective, you should invest in blue-chip stocks that have a Market Cap>200 B and Average volume(90 Days) >500k.
For options trading, you should trade in Index Future Stock and for day trading you should choose a highly volatile stock.
Technical Indicators
Technical indicators are the signals that are based on mathematical calculations and can help predict the future moves of the market. There are two types of technical indicators
Lagging Indicators
A lagging indicator is a financial indicator that is visible only after a large shift has taken place. Therefore, lagging indicators confirm long-term trends, but they do not predict them. The most popular lagging indicators are Moving Average, MACD, and RSI.
Moving Average
The moving average (MA) is a simple technical analysis tool that smooths out price data by creating a constantly updated average price. The average is taken over a specific period, like 10 days, 20 minutes, 30 weeks, or any time period the trader chooses.
It is used in the trending market. It tells us about trends, not the top or bottom. Long term traders usually use 200,100,50 period moving average while for positional it is (50,21,14) and for intraday(14,7,3) period.
When a fast MA crosses above a slow MA it’s a buy signal and vice versa.
MACD (Moving Average Convergence/ Divergence)
It is used in the trending market. It tells us about trends, not the top or bottom. Long term traders usually use 200,100,50 period moving average while for positional it is (50,21,14) and for intraday(14,7,3) period.
When a fast MA crosses above a slow MA it’s a buy signal and vice versa.
MACD (Moving Average Convergence/ Divergence)
It is a trend-following momentum indicator that shows the relationship between two moving averages of a security's price. The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA.
It has three lines: Fast length slow length and the signal line. Its inputs are usually chosen as 12,26 and 9.
When there is crossing over the signal line, it's considered as a buy signal and vice versa.
RSI (Relative Strength Index)
It has three lines: Fast length slow length and the signal line. Its inputs are usually chosen as 12,26 and 9.
When there is crossing over the signal line, it's considered as a buy signal and vice versa.
RSI (Relative Strength Index)
It measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. It oscillates between 0 and 100 levels. Its popular levels are 70,60,50,40 and 30. 14 day RSI is the most frequently used one.
When RSI>70 it is said to be in the overbought range while RS1<30 is said to be in the oversold range.
Leading Indicators
A leading indicator is a tool designed to anticipate the future direction of a market, to enable traders to predict market movements ahead of time. The most popular leading indicators are Divergence and Bollinger Band.
When RSI>70 it is said to be in the overbought range while RS1<30 is said to be in the oversold range.
Leading Indicators
A leading indicator is a tool designed to anticipate the future direction of a market, to enable traders to predict market movements ahead of time. The most popular leading indicators are Divergence and Bollinger Band.
Divergence
Divergence is when the price of an asset is moving in the opposite direction of a technical indicator, such as an oscillator, or is moving contrary to other data. Divergence warns that the current price trend may be weakening, and in some cases may lead to the price changing direction.
It is of two types positive (when the price is going down and the indicator is moving up) and negative (when the price is going up and the indicator is moving down) divergence.
Bollinger Band
It is of two types positive (when the price is going down and the indicator is moving up) and negative (when the price is going up and the indicator is moving down) divergence.
Bollinger Band
It is a volatility indicator and tells about breakouts and the continuation of trends. Bollinger Bands use 2 parameters, Period and Standard Deviations. It shows 3 lines: the middle one is the moving average and the upper on lower ones are standard deviations above and below the centre moving average.
As the band tightens, sharp changes tend to occur as volatility lessens. When price moves outside the bands, a continuation of the current trend is implied. Bottoms and tops made outside the bands followed by bottoms and tops made inside call for a reversal in the trend.
Apart from the above-mentioned indicators, there are many other indicators as well. Using two similar types of indicators can be confusing and might give the wrong signals. Therefore it is advisable to use 3-4 indicators of opposite nature while doing the technical analysis.
There are many important chart patterns like the hanging man pattern, hammer pattern, etc, and some types of candles and gaps in the charts that should also be looked upon while doing the trade.
It is always advisable to first learn about these indicators then apply them in the previous charts to know better about working them. You should first start with paper trading and gain confidence before directly venturing out into the market.
Written by - Mohammad Saad
As the band tightens, sharp changes tend to occur as volatility lessens. When price moves outside the bands, a continuation of the current trend is implied. Bottoms and tops made outside the bands followed by bottoms and tops made inside call for a reversal in the trend.
Apart from the above-mentioned indicators, there are many other indicators as well. Using two similar types of indicators can be confusing and might give the wrong signals. Therefore it is advisable to use 3-4 indicators of opposite nature while doing the technical analysis.
There are many important chart patterns like the hanging man pattern, hammer pattern, etc, and some types of candles and gaps in the charts that should also be looked upon while doing the trade.
It is always advisable to first learn about these indicators then apply them in the previous charts to know better about working them. You should first start with paper trading and gain confidence before directly venturing out into the market.
Written by - Mohammad Saad
Edited by - Maryam Salim
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8 Comments
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DeleteInformative, all explained in simple language
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DeleteVery enlightening 👍🏻
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