What is Technical Analysis of Stocks?

What is Technical Analysis of Stocks?

Is investing in the stock market simple? If it was, everyone would be Warren Buffet, right? Somehow that is true. It is never easy to invest in the stock market, and everyone has their own difficulties. When you enter the stock market – strategies become your best friend – someone you lock hands with and take the whole journey to. You are maybe wondering how many tricks and tools you need to keep acquiring. But, it is honestly worth every bit of it. This article is also going to be part of learning for you – and here, let’s talk about the technical analysis that you can use for your investments in stocks.

What is the Meaning of Technical Analysis?

Technical analysis – is a tool or process that uses market data to forecast the likely future price movement of a security, such as a stock or currency pair.

The principle underlying technical analysis’s validity is the idea that the aggregate activities – buying and selling – of all market participants accurately represent all relevant information relative to a traded security and hence consistently assign a fair market value to the security.

The Use of Technical Analysis

Professional analysts frequently combine technical analysis with other types of study. Retail traders may base their conclusions only on a security’s price charts and related figures, but competent stock analysts rarely confine their research to fundamental or technical analysis alone.

Any security with the older trading data can be subjected to technical analysis. This comprises stocks, futures, commodities, fixed-income securities, currencies, and other financial instruments. Indeed – technical analysis is significantly more common in commodities and FX markets, where traders are concerned with short-term price changes.

Technical analysis aims to estimate the price movement of nearly any tradable asset that is susceptible to supply and demand pressures, like stocks, futures contracts, bonds, and currency pairs. Indeed, some regard technical analysis as merely the study of supply and demand forces as represented in a security’s market price movements.

Let’s say you choose stocks from the top most famous indices – do you think just by choosing the top rated stocks, it would be only profits? That is not always the case. Even if you are choosing stocks from indices, you would have to choose strategies and analyses to know what is the best for you. For instance, you are choosing a midcap stock from Nifty midcap, and after a week’s time, it drops. With a technical analysis – you would know what the future holds for you with the stock.

The Holy Grail of Technical Analysis

  1. a) Relevant information about the stock is reflected in the stock price.
  2. b) Stock prices will move in trends.
  3. c) History trends tend to repeat over time.

Charts of Technical Analysis

As you may expect, standard charts such as the column chart, pie chart, area chart, and so on are ineffective for technical analysis.

  • Line chart
  • Japanese Candlestick
  • Bar Chart

How to Benefit from Technical Analysis

Trend Analysis – The ultimate benefit of technical analysis is that it enables traders and investors to forecast market futures and make investment and trading decisions based on the study. The market typically has three trends: uptrend, downtrend, and sideways or ranging market, which are easy to predict using technical analysis.

Psychology Factors – Technical analysis aids in understanding the market psychology of investors and traders and provides a clear grasp of what they are doing.

Early Signs – The main advantage of technical analysis is that it provides early warning signs before a trend reversal, allowing investors and traders to make decisions based on those indications. Market makers’ activity can be evaluated using technical analysis, and such activities can be seen in Price-Volume Analysis.

Stopping Loses – Technical analysis clearly defines the Stop Loss and Target for investors’ and traders’ market positions. This enables traders and investors to make decisions based on their unique risk tolerance.

Data – Swing traders, intraday traders, short-term traders, and long-term investors can all benefit from technical analysis. Technical charts provide precise information that assists investors and traders in adopting the appropriate position in the market and building their portfolios. Chart Patterns, Candlestick Patterns, Volatility, Support, and Resistance, among other things, give traders and investors a wealth of information.

Since you know the good stuff, it is only right when you also know some of the drawbacks.

What are the Drawbacks of Technical Analysis?

  • Some analysts and academic researchers believe that the EMH explains why they should not anticipate any actionable information from past price and volume data; yet, by the same logic, business fundamentals should not yield any relevant information. These perspectives are known as the EMH’s weak and semi-strong forms.
  • Another objection leveled against technical analysis is that history does not repeat itself perfectly, so price pattern analysis is of questionable value and should be avoided. Prices appear to be better predicted when a random walk is assumed.
  • A third criticism that technical analysis falls under is that it only works in specific circumstances since it is self-fulfilling. Many technical traders, for example, will set a stop-loss order below a company’s 200-day moving average. If a huge number of traders have done so and the stock reaches this price, there will be a high number of sell orders, causing the stock to fall, confirming the expected trend.
  • Then, as the price falls, more traders will sell their positions, confirming the strength of the trend. This short-term selling pressure is self-fulfilling, but it has little influence on where the asset’s price will be in weeks or months.

To summarize, if enough others employ the same signals, they may create the movement predicted by the signal, but this small group of traders cannot drive the price in the long run.

Final Thoughts

It is easy to just step into the stock market without any thought, but it is never easy to stay there. Everything is hard, though; one thing is always a given – big rewards come with high risks. These risks that you take wouldn’t harm you when you keep learning along the journey.