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What is Technical Analysis? Definition, Basics & Examples

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What is Technical Analysis? Definition, Basics & Examples

What is Technical Analysis? Definition, Basics & Examples

NIWS 24 Dec 2022

What is Technical Analysis? Definition, Basics & Examples

 

Stock Market Investment is a recent trend amongst youngsters and individuals. They are showing great interest in learning more about the trading strategies in the stock markets. But, the stock market is highly volatile, and one needs to be well prepared before investing your money. 

However, investors and analysts need technical analysis to invest in the stock market

But doing technical analysis needs proper knowledge and skills; else will be like sailing close to the wind.

 

When you look for an investment opportunity in the capital market, whether it's equity, mutual fund, derivatives, or commodity, technical analysis helps you to keenly observe the fundamental, financial, and psychological aspects of the company, industry, and other players in the market.

 

Our  online advanced technical analysis course is a full-proof strategy to help you avoid making hazy investments and incurring losses. You can take calculated risks for high returns with the proper knowledge and insight about successful trading strategies. 

 

NIWS provides the best Stock Market Course In Jaipur. We are one of the top institutes in the country specializing in financial courses like Banking, Finance, Stock Market, Portfolio and Wealth Management to Technical and Fundamental analysis. With over 10-15 years of experience as a professional in domestic and international markets, we strive to help students to achieve their lifelong career goals and aspirations.

 

After completing the stock market course, you should read our blog to learn about career growth.

What is Technical Analysis?

Technical analysis is a study, tool, method, or discipline employed by the investor to predict or analyze the future price of financial instruments like shares, bonds, and stocks by studying charts, prices, volume trends, and many other factors.

 

Hard to understand what technical analysis is in the stock market. 

 

Here is an example that will help you understand:

 

Suppose you bought share XYZ on 1st Jan 2023. Now, you need technical charts to help you predict the prices for the next hour, day, or month. Using tools like bar charts, line chart candlesticks, and the Fibonacci series to observe patterns, trends, and changes for forecasting the price of a share in the future is a Technical analysis trading skill. Whereas Fundamental analysis helps you know more about the company's future prospects.

 

Difference Between Technical Analysis V.S Fundamental Analysis

 

Basis Of Difference

TECHNICAL ANALYSIS

FUNDAMENTAL ANALYSIS

Meaning

Technical analysis is a method of analyzing charts based on price, indicators, patterns, and statistics used to forecast the share price. 

Fundamental analysis is the study of fundamentals of a business like the overall economy, earnings, cash flow, balance sheet, and expenses for calculating the value of a stock.

Focus

This analysis only focuses on pie charts, trends, history & the prices of shares.

This analysis focuses on both qualitative and quantitative factors.

Time Horizon

Technical analysis is a short-term approach that examines movements of stock price, their volume & trends.

A fundamental analysis is a long-term approach that examines data over a long period. 

Relevancy

Technical analysis is relevant only for short-term trading.

Fundamental analysis is relevant only for long-term investing.

Buy & Sell

Trends, charts, indicators, support, and resistance levels are used in technical analysis to determine whether to buy a stock based on its ability to be sold at a higher price.

In Fundamental analysis, when the price of the stock is undervalued, it's purchased, and when the price is overvalued, it's sold.

Data Collection

In Technical analysis, the company's past data is considered.

In Fundamental analysis, the company's overall historical data is considered.

Indicators

in Technical analysis are Trend following, support, and resistance, EMA, charts, MFI & MACD.

Indicators in Fundamental analysis are: (EPS) Earning per share, (FCF) Free cash flow, Price to earning ratio (P/E), Dividend yield ratio, and Price to sale ratio (P/S)

Types of Investors

are Short-term traders & swing traders.

Long-term investors.

Concepts

that are used in Technical analysis are Dow theory, Price data, Dead cat, and Chart pattern

Concepts that are used in Fundamental analysis are (ROA) Return on Asset & (ROE) Return on Equity.

Methodology

Along with price movements of shares through charts. Technical analysis also examines the trends, emotions of people & market psychology.

The fundamental analysis examines the trends in the industry, economic indicators, analysis of competitors, companies, and financial data.


 

Assumption of Technical Analysis

For a better understanding of what technical analysis is, let's look at the basic assumptions of technical analysis:

1) Market Discounts Everything

The technical analyst assumes that all the investors are aware of everything happening about a stock that affects the price beforehand by incorporating fundamental analysis; therefore, the only thing studied under technical analysis is the price movements that get affected by the forces of demand and supply which are represented on charts.

 

2) History Tends To Repeat Itself

This second assumption of Technical analysis states that the trends are repetitive, and both human behavior and human history repeat themselves.

As the stock price pattern is repetitive technical analysts observe the past stock price to predict future price trends by using chart patterns.

This repetitive nature of trends clearly shows fixed investor psychology.

3) Price Moves In A Trend

Technical Analysis is based on this foundational logic known as TRADE WITH TRENDS.

This last assumption of technical analysis shows that price follows a past trend rather than moving unevenly.

Trends can either be Uptrend, Downtrend, or Sideways.

Every stock chart depicts its unique trend, and the stock price moves within this trend. As per this assumption, when a trend gets published, the stock price is assumed to move in a particular pattern until and unless a new trend is identified.

 

So while trading and investing based on Technical Analysis, it is important to keep all these above assumptions in mind.

Types Of Technical Charts

  1. Bar Charts

Bar charts are traders' most straightforward charts. It consists of a series of vertical lines which tells you about the (OHLC), i.e., the opening, high, low, and close & mark the fluctuations of the shares price during a particular time.

To the right of the horizontal dash, you can see a horizontal line showing the opening price; to the left, it shows the closing price.

Red lines indicate a lower closing price than the opening price. If the closing price exceeds the opening, the line is indicated in black or green color.

 

  1. Line Chart

Charts like this are known to connect different closing prices. These charts are known as fundamental forms of technical analysis that experts use.

The best thing about this chart is that it helps the investor to get the big picture of past and present asset prices.

  1. Candlestick Chart

Investors must identify trading patterns using candlesticks to enter a profitable trade. In this case, patterns are represented by combining two or more candles. A single candlestick can provide a better and more efficient market representation than multiple candles. 

Taking advantage of these patterns, a trader can:

  • Buy those more robust positions that can be indicated through the (bullish candle).

  • Selling feeble positions that can be indicated through the red candlestick.

  • Examine the preceding trend, i.e., if the current trend is bullish, then the preceding trend must be bearish & vice-versa.

Types of Candlestick Patterns

Single Candlestick

  • Marubozu 

The word Marobuzo in Japanese means bald. So, in simple words, Marubozu is a candlestick with no upper or lower shadow, which means the security's price won't go above or below its opening and closing price.

 

  • Doji 

Dojis occurs when the opening and closing prices of shares are almost the same. Through this candlestick pattern, traders learn about the market sentiments.

 

  • Paper Umbrella

It's called a paper umbrella because of its structure, like an umbrella where you have a small real body with a long lower wick. The purpose of this pattern is to indicate which direction trades are taking place at a particular time. A pattern of this type changes its name in a downtrend or an uptrend. 

 

So when you see this pattern in a downtrend, it's called a hammer & when you see this pattern in an uptrend, it's called a hanging man.

 

  • Shooting Star

If you understood the paper umbrella well, you'd definitely understand the shooting star exceptionally well.

The shooting star is the inverted form of a paper umbrella and is bearish in the uptrend.

Multiple Candlestick

  • Engulfing patterns

If an investor wants to identify the trading opportunity, a single candlestick is enough, but if he wants to make an effective trading decision, multiple candlesticks are formed. 

In engulfing, two candles form a pattern. The first candle is a small body. And the second candle is a tall body that engulfs the first candle's body completely. 

You can understand this with an image.

  • Piercing Pattern & The Dark Cloud Cover

This pattern is actually very similar to bullish and bearish engulfing with a slight difference. 

  • The second day's blue candle partially engulfs the first day's lower candle (Red).

  • The first day's blue candle being engulfed by the second day's red candle is observed by the dark cloud cover.

 

Technical Analysis Indicators

These are some indicators that traders or investors utilize to gauge the fluctuations in the market to make better investment decisions.

  1. Bollinger Bands

This indicator measures the volatility of a market. With the second band being the moving average of 20 days, there are three bands, where the first and third are standard deviations of +2 and -2, respectively. The wider the bands, the greater the stock volatility & vice-versa

  1. Relative Strength Indicator (RSI)

This indicator measures the immensity of fluctuation in price. This indicator indicates whether the price of the assets is overbought or oversold.

 

Let's say if the reading of an asset on the scale from 0 to 100 is 80, then the price of an asset will come in the region of overbought, whereas if the reading of another asset is below 20, then this asset is in the oversold zone.

  1. Oscillators

Oscillators are tools that analysts use to determine whether stocks are overbought or oversold on a short-term basis. There is usually a range for oscillators (or a set of levels or lines). 

  1. Support And Resistance

  • On the chart, Support And Resistance refer to price points.

  • Support indicates buying interest when a stock or share is priced below the current market value.

  • Resistance indicates selling interest when a stock or share is priced above the current market value.

  • Support And Resistance can be identified by drawing a horizontal line in a chart that connects at least three well-spaced price action zones. 

  • You can use Support And Resistance to identify targets and stop loss for your trade. 

 

Why is it Important to Do a course in Technical Analysis From NIWS?

Technical analysis has certain limitations which, if not properly addressed, can lead to havoc.

 

NIWS brings the most advanced Technical Analysis Courses to Delhi, Jaipur. The course empowers students with portfolio management skills. After completing the course, our students are making money by intraday jobbing and investing in the stock market. While many have procured NIMS certificates and are placed at a good profile, the course has surely given a  better entry and exit timing and boosted Risk management skills. Some of the limitations which need to be overruled by the professional courses include: 

  • Technical Analysis does not give any confirmation. This analysis is all about probability.

  • Two technical analysts may have contradicting views regarding the same stock, giving a biased view.

  • This analysis sometimes gives mixed signals as one indicator shows a buy signal, and the other shows a sell signal simultaneously.

  • Investors or traders oscillate between two different approaches, leading them not to consistently follow their own analysis, ultimately resulting in the loss of their money.

  • It's easy to understand Technical Analysis basics, but implementing them in the real market is tricky.

  • One of the significant drawbacks of technical analysis is that it does not account for the fundamentals, i.e., the company's earnings, how a company is doing on its underneath surface, external events & corporate reports.

  • In technical analysis, the buying decisions of investors or traders always rely on charts, and because of this method, they don't even know why they were buying that company's share.

 

Conclusion

You can make huge profits through technical analysis in the stock market. What you require is guidance &  knowledge about what is a technical analysis of the stock market, so that can make you the best OG of technical analysis. The technical analysis institute in Delhi is waiting for you to provide all the proper knowledge required to make you the best technical analyst in the world.

 

NIWS is the predominant stock market institute in Jaipur. For intelligent investment, trading, data analysis, and research, we offer a comprehensive list of Stock Market courses on the NSE, BSE, SEBI, NCFM, and NISM. We have our centers located in Delhi and Jaipur. 

 

We also provide online courses to learn from anywhere in the world. Our courses are of professional level, which could also help you get the best jobs in Stock Market broking firms as an Investment Advisor, Technical and Fundamental Analyst.



 

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