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Advanced Technical Analysis Concepts by NIWS

Advanced Technical Analysis Concepts by NIWS

Advanced Technical Analysis Concepts by NIWS

Umesh Sharma 12 Sep 2020

Technical Analysis


“Stock Market is Fire, Rules, Tools, and Strategy are Gasoline to win the game”

Technical analysis is a method used to predict future prices on the basis of historical price, volume, and open interest. Technical analysis can help investors anticipate what is "likely" to happen in the coming days, weeks, or months. Technical analysis is the study of past data to predict the future. The past data which we study will be of price and volume to analyze the future price action.

For example:

When someone visits a Palmist, he studies the lines in our hand and based on the analysis which he has studied by analyzing the lines in the past will help him to predict the future which means history tends to repeat itself which means that to predict the future one needs to have the past data which is called analysis.

Technical analysis is applicable to stocks, commodities, futures, indices, or any tradable instrument where the price is influenced by the forces of supply and demand i.e. volumes. To analyze a stock or commodity we need information like prices, volumes, and open interest on a chart and applying various patterns and indicators to it in order to assess the future price movements. Price refers to any combination of the open, high, low, or closes for a given security over a specific time frame. The time frame can be based on intraday (1-minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes, or hourly), daily, weekly, or monthly price data, and last a few hours or many years. In addition, some technical analysts include volume or open interest figures with their study of price action. The study is done with the help of candlestick charts and patterns.

 What is Layman Trader Phycology?

In stock market trading the fact is that 98% of traders lose money and 2% traders make money. Trading is a zero-sum game which means 2% of the traders take away 98% of traders’ money. This 2% of traders have huge money flow and news flow and in a technical language, they are called the operators of the market. In the short term demand and supply plays an important role compared to fundamental aspects which is the basic essence of trading. When the layman trader (98% of them) enters into the trade on the buy-side or sell-side based on the news flow created by the market for short term trading the demand/supply created by them is fulfilled by the 2% operator. The real Game Begins Now! The price will now move against the 98% layman traders and it will continuously move opposite till the time the entire 98% trader’s capital is wiped out.

“ Market always move anticlockwise of layman traders”

One should always remember to fly the kite in the direction of the wing. The trend is the best friend of the trader. Change in the trend of the market needs a change in the behaviour of a trader because you need to flow with the market and cannot win no matter what when you try to go against the market. 

A layman trader does not always sit in the wrong trade but he is not able to reap the entire profits when he is in the profitable trade and wipes out his entire capital when he is in the wrong trade because he doesn’t have a proper entry, exit plan, and stop-loss when the trade or the price action is against him. Further, the market tries to manipulate you by its action and try to enforce a traders' phycology to enter into a wrong trade and play with emotions and human psychology.  

For example:

In the game of Cricket, when a batsman hits the first two balls of a bowler out of the court ‘SIX! SIX!,  the bowler psychology changes, and instead of trying to bowl him out he tries to finish the next four balls as a DOT. The batsman takes advantage of this change in emotions and scores more in the same over. Similarly, a trader enters into the trade when the market opens to make a profit but when he loses money in the first trade due to wrong trade setup than his phycology changes and instead of entering a proper trade setup for making a profit he tries to recover his loss which is the change in psychology and behavior which is called emotions. 

“ There should not be any Emotions when you are in  Trading” 

How technical analysis helps you in trading?

 Technical analysis helps a stock market trader to enter into the trade with a proper entry plan of how to select a stock and helps a trader to have a proper exit plan in not only the profitable trades but also an exit plan in his wrong trade setup. Further, it indicates when a trader should try to maximize his profits with the help of tools and indicators when the volumes are supporting the price. Practice and Patience is the key to success in trading.

“Tools, Rules, and Strategy is the key to success in Trading in Stock Market”, Stock Market is like a game of Chess”. A trader needs to have a proper strategy for his intraday/swing trading with money management and he needs to have the data of price and volume for the study and analysis to win big in stock market trading.

Trading is not a team game it's a One Man Show! A perfect Trader is the one who has the proper strategy to take 

What is the basic Assumption of Technical Analysis?

Price Discounts Everything:

Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value and should form the basis for analysis.

After all, the market price reflects the sum of knowledge of all participants, including traders, investors, portfolio managers, buy-side analysts, sell-side analysts, market strategists, technical analysts, fundamental analysts, and many others. 

Technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company - including fundamental factors. Technical analysts believe that the company's fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market.

The market price reflects the sum knowledge of all participants, including traders, investors, portfolio managers, buy-side analysts, sell-side analysts, market strategists, technical analysts, fundamental analysts, and many others.


Price Movements Are Not Totally Random:

Most technicians agree that prices trend. However, most technicians also acknowledge that there are periods when prices do not trend. If prices were always random, it would be extremely difficult to make money using technical analysis.

A technician believes that it is possible to identify a trend, invest, or trade based on the trend and make money as the trend unfolds. Because technical analysis can be applied to many different time frames, it is possible to spot both short-term and long-term trends. Most technical trading strategies are based on this assumption. “Trade with the trend” is the basic logic behind the technical analysis. 

What Is More Important than Why :

A technical analyst knows the price of everything, but the value of nothing.

Technicians, as technical analysts are called, are only concerned with two things:

1: What is the current price?

2: What is the history of the price movement?

All of you will agree that the value of any asset is only what someone is willing to pay for it. Who needs to know why? By focusing just on price and nothing else, the technical analysis represents a direct approach. The price is the final result of the fight between the forces of supply and demand for any tradable instrument.

The principles of technical analysis are universally applicable. The principles of support, resistance, trend, trading range, and other aspects can be applied to any chart. Technical analysis can be used for any time horizon; for any marketable instrument like stocks, futures, and commodities, fixed-income securities, forex, etc.

This may sound easy that we can generate calls by using principle rules, technical analysis is by no means easy. Success requires serious study, dedication, and an open mind.

Step by step analysis of any stock or commodity:

1: Overall Trend

2: Support and Resistance

3: Buying and Selling Pressure

4: Relative Strength

Technical analysis uses a top-down approach to investing.

For each stock, an investor would analyze long-term and short-term charts.

Consider the overall market, most probably the index which is called market behavior.

If the market is in bullish mode then select the particular sector then select the stocks.


Supply, Demand, and Price Action:

Many technicians use the open, high, low, and close when analyzing the price action of a security. There is information to be gleaned from each bit of information.

Separately, these will not be able to tell much. However, taken together, the open, high, low, and close reflect forces of supply and demand.


“ The effort and toil given in your practice and training will help a soldier to save his blood when he is in war!”





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