Technical Analysis (also known as TA) is a popular strategy for developing a point of view on a certain stock or index, as well as the formulation of trades – all while considering entry, exit, and risk views.
Like other research methods, technical analysis has its own set of characteristics, some of which might be rather complex.
Let’s go through some crucial terms that we’ll encounter on our quest to study technical analysis:
Trade types – Technical analysis is excellent for spotting short-term trades. Fundamental analysis is the most effective method for identifying long-term investment opportunities, hence Technical Analysis should be avoided while looking for long-term investment chances. If you’re a fundamental analyst, use Technical Analysis tools to calibrate your entry and exit points.
Technical Analysis-based transactions are frequently short-term in nature. It is impractical to expect large returns in a short period of time. The key to profiting from Technical Analysis is to identify several short-term trading opportunities that yield small but consistent profits.
Technical analysis trades can last anywhere from a few minutes to a few weeks, but not more than that.
Risk – Traders frequently begin a trade with a certain goal in mind; but, if the stock swings in the incorrect direction, the trade begins to lose money. In such situations, traders generally cling on to their losing deals in the hopes of recouping their losses. Remember that the key to profiting from technical analysis is to remember one fundamental principle: Technical Analysis-based trades are short-term, so if things go wrong, cut your losses and move on to another opportunity.
Now we’ll take a look at one of the most important features of technical analysis: charts.
Charts play a big role in technical analysis. This is because the price is the most important indicator of a market’s past and current performance; it is the starting point for determining the possibility of a deal. Price activity, which can be seen on a chart, is the clearest indication of what the price is doing.
Charts can assist you determine the overall trend, whether it’s upward or negative, long or short term, as well as detect range bound situations. The most common types of technical analysis charts are line charts, bar charts, and candlestick charts.
When utilising a bar or candlestick chart, each period will give the technical analyst information on the price at the time it started, as well as the high or low of the period and the period’s close.
Indicators are used by technical traders while looking for market chances. Despite the fact that there are various indicators available, traders often use volume and price-based indicators. These can assist you in determining where the levels of support and resistance are, how frequently they are maintained or breached, and how long a trend has been going on.
A trader can monitor the price or any other indicator using a variety of time frames ranging from one second to a month, providing them a unique perspective on the price activity.
The following are some of the more commonly used indicators in technical analysis:
- Averages of Moving Averages
- Index of relative strength (RSI)
- Divergence between moving average convergence and divergence between moving average convergence and divergence (MACD)
Finally, we may state that technical analysis is not for the faint of heart. To succeed, it takes a great deal of discipline and understanding of oneself as a trader. Technical analysis is growing increasingly popular thanks to developments in charting software and trading platforms. For a novice trader, understanding technical analysis – and how it might help forecast market patterns – can be scary and complex.
If you wish to learn more about technical analysis, check out this course by FinLearn Academy on Technical Analysis which takes you through the basics of the candlestick chart patterns and helps you master the profitable strategies to make successful stock decisions.