Let the drum rolls begin ( 🥁 🥁 🥁) because we are back again, on a new Monday with a new topic. You would perhaps remember, we started off April with fresh notes and hues of the Stock Market of USA! And so this time we cast off with a similar topic that’ll interest you – Technical Analysis
Off the bat, Technical Analysis is not as difficult or complicated as it sounds. To put it mildly, Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts believe that market trends, regardless of security, can be identified and predicted through the analysis of charts and other technical indicators. In other words, they look at the history of a stock’s trading pattern to determine the potential for future price movements.
Still a little complex?
Let’s break it down 👉
Think of it like weather forecasting. Can weather be predicted for the Future? YES
Is the weather forecast 100% accurate, always? No…
The weather forecast is applicable over a period of time rather than a second-on-second basis? YES
Touche! Just as meteorologists use past weather data and atmospheric patterns to predict future weather conditions, technical analysts use past price and volume data to predict future stock prices.
Fun fact 👉
Women are increasingly participating in the Indian stock market, with the number of female investors growing by over 50% in the past few years.
But how do I do this? How do I technically analyse an asset?!
You see, The first step in technical analysis is to choose a security to analyze. This can be a stock, a commodity, a currency pair, or any other financial instrument that is traded on an exchange. Once you have chosen the security, the next step is to analyze its price and volume data.
One of the most commonly used tools in technical analysis is a price chart. A price chart is a visual representation of a security’s price movements over time. There are different types of price charts, but the most commonly used is the candlestick chart.
Candlestick charts provide a lot of information in a single view. Each candlestick represents a certain period of time, such as one day or one hour. The body of the candlestick represents the opening and closing prices of the security during that period, while the wicks or shadows represent the highest and lowest prices reached during that time. By analyzing these candlesticks, a trader can identify patterns and trends in the security’s price movements.
In addition to price charts, there are many technical indicators that a trader uses to analyze securities. These indicators are mathematical calculations based on the price and volume data of a security. They are used to confirm trends, identify potential buy or sell signals, and provide additional information to a trader.
Some of the most commonly used technical indicators include moving averages, relative strength index (RSI), and Bollinger Bands et al.
And so you’d ask, what do the above jargons even mean? ☝️
📉 Moving Averages: A moving average is a line that represents the average price of a stock over a specific period of time. It can help you identify trends and support/resistance levels.
📊 Relative Strength Index (RSI): The RSI is a momentum indicator that measures the strength of a stock’s price action. It ranges from 0 to 100, with readings above 70 indicating an overbought condition and readings below 30 indicating an oversold condition.
📉 Bollinger Bands: Bollinger Bands are lines that are plotted two standard deviations away from a moving average. They can help you identify volatility and potential support/resistance levels.
📊 Moving Average Convergence Divergence (MACD): The MACD is a trend-following momentum indicator that consists of two lines that oscillate above and below a zero line. A crossover of the MACD lines can indicate a potential change in trend.
Fair, what are some Do’s & Don’ts to follow?
Perfect Question doesn’t exis… 😛
So far we’ve understood the importance of T.A. You see, the number of retail investors has also grown manifold in India, with the total number of demat accounts in India crossing a whopping 11 crore, or 110 million!
However, while technical analysis can be a valuable tool for a trader, it is important to follow certain do’s and don’ts when using this method. Here are some important ones to keep in mind:
Use multiple indicators: Technical analysts often use multiple indicators to confirm trends and signals. By using more than one indicator, a trader can increase his/her confidence in a potential trade.
Keep an eye on volume: Volume is an important component of technical analysis. A high volume of trading can indicate a strong trend, while a low volume may indicate a lack of interest in security.By the way, speaking of volumes; the most traded shares in India ( by volume) are usually banks and they keep topping the charts. You can find them right here!
Practice risk management: Perhaps the most important tip is, that Technical analysis can help identify potential trades, but it is necessary to practice good risk management. This includes setting stop-loss orders and not risking more than a certain percentage of your portfolio on any one trade.
Stay up-to-date: The stock market is constantly changing, so it is important to stay up-to-date on news and events that could impact your investments.
Overcomplicate things: Technical analysis can be complex, but it is important not to overcomplicate things. Stick to the basics and you should be good 👍
Ignore fundamental analysis: While technical analysis is important, it should not be the only method used to evaluate securities. Fundamental analysis, which looks at a company’s financial statements and economic factors, should also be considered. P.S: We’ll be covering this soon, so stay tuned and you should be good
Follow emotions: Often said, more-than-often neglected – Trading can be emotional. But it is important not to let emotions cloud your judgement. Stick to your strategy and don’t make impulsive trades based on fear or greed.
Neglect risk-reward ratio: When evaluating potential trades, it is important to consider the risk-reward ratio. This means assessing the potential profit compared to the potential loss. A good risk-reward ratio can help ensure that potential gains outweigh potential losses.
Lest we forget
If you’ve reached here, we are mighty pleased! A quick recap tells us that technical analysis is a valuable tool for traders & budding investors looking to identify potential opportunities in the Indian stock market. By analyzing price and volume data, traders can identify patterns and trends that can help inform their trades. However, it is important to follow certain do’s and don’ts when using this method. By using multiple indicators, practising good risk management, and staying up-to-date on market news, traders can increase their chances of success while avoiding common pitfalls such as overcomplicating things, ignoring fundamental analysis, following emotions, and neglecting risk-reward ratios. Remember, technical analysis is just one useful tool in a trader’s toolbox, and it should be used in conjunction with other methods such as fundamental analysis and risk management.
If you want to learn more about technical analysis and trading in the Indian stock market,a few resources that will help you zoom past the basics are ▶️
Guide on Technical Analysis https://www.5paisa.com/stock-market-guide/stock-share-market/technical-analysis-of-financial-markets
Unarguably, the gospel terminal of ALL charts & Technical Analysis tools
If you’re looking for video tutorials then look no further >
Want to become a pro at this game? NSE’s course can help you