Technical Analysis (commonly known as TA) is a popular method for the development of a point of view on a specific stock or index, as well as the definition of trade – and doing all this while keeping the entry, exit, and risk perspectives in mind.
Technical Analysis, like all research approaches, has its own set of characteristics, some of which can be quite complex.
Let us now understand some key words which we would be using in our journey of learning technical analysis:
Types of trades — Technical Analysis is great for identifying short-term trades. Technical Analysis should ideally not be used to find long-term investing possibilities since Fundamental analysis is the most effective tool for identifying long-term investment opportunities. Use Technical Analysis techniques to calibrate the entry and exit positions if you’re a fundamental analyst.
Return on Trade— Technical Analysis-based trades are often short-term. Expecting big returns in a short period of time is unrealistic. The key to making money using Technical Analysis is to spot frequent short-term trading opportunities that produce small but consistent profits.
Holding Period – Technical analysis trades can last anywhere from a few minutes to a few weeks, but usually not longer.
Risk – Traders often start a trade for a specific reason; nevertheless, if the stock moves in the wrong direction, the transaction begins to lose money. Traders typically hold on to their losing trades in such scenarios in the hopes of recouping their losses. Remember that they key to making money in technical analysis is not forget one key principle – Technical Analysis based trades are short-term, so if things go wrong, trim your losses and move on to find another chance.
Now we will look into a major feature that is used in technical analysis – charts.
Technical analysis relies heavily on charts. This is because the price is the most essential gauge of a market’s historical and current performance; it is the beginning point for judging a trade’s potential. The clearest indication of what the price is doing is price action, which may be shown on a chart.
Charts can help you figure out the overall trend, whether it’s upward or downward, and whether it’s long or short term, as well as detect range bound circumstances. Line charts, bar charts, and candlestick charts are the most frequent types of technical analysis charts.
When using a bar or candlestick chart, each period will provide the technical analyst with information on the price when it opened, as well as the high or low of the period and the closure.
When technical traders are seeking market opportunities, they use indicators. Traders frequently utilise volume and priced-based indicators, despite the fact that there are several indicators available. These can help you figure out where the levels of support and resistance are, how often they are maintained or breached, and how long a trend has been going on.
A trader can use numerous time frame analysis to view the price or any other indicator, ranging from one second to a month, giving them a different viewpoint on the price activity.
The more popular indicators for technical analysis include:
- Moving Averages
- Relative strength index (RSI)
- Moving average convergence divergence (MACD)
In conclusion we can say that technical analysis is not for the weak hearted. It requires immense amounts of discipline and knowledge of oneself as a trader in order to succeed. Thanks to advancements in charting software and trading platforms, technical analysis is becoming a more common way to trading. Understanding technical analysis – and how it might assist predict market patterns – can be intimidating and difficult for a rookie trader.
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.