Technical analysis

Course name: Market analytics

One of the key factors in investing or trading the stock market is to correctly speculate on the price of the asset that will be traded in the market. The amount of profit you might earn directly depends if the price of the market follows the direction you predicted. If the market goes in the opposite direction, then you bear a loss.

It takes about: 10 minutes

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Traders have always used different methods to analyze the trend of the market before entering or exiting a trade. The two most common procedures to evaluate a financial assets are called ‘Fundamental Analysis’ and ‘Technical Analysis.’

Technical analysis of Financial Markets

The most important factor while trading in the financial market is to know about the current trends and utilize past data to predict the future direction accurately. Technical analysis is all about assessing and speculating the price changes in any given financial market by using tools such as statistical data and historical charts.

The main emphasis of the analysis is to help a trader identify the commonalities in the previous market patterns and make a close prediction on the future direction of price. Technical and fundamental analysis are the two most popular methods of assessing the financial markets. The fundamental analysis determines the intrinsic or true value of the asset by examining the company’s performance and economic conditions. In contrast, technical analysis is used to identify the trend and predict future price movements.

Traders can study the price charts and devise a method on how to enter and exit a trade effectively. The patterns would more or less be repeated as the greatest number of traders will identify the support and resistance levels and focus on the same price points.

Understanding Technical Analysis for Stock Trends

The fundamental analysis is done to determine the intrinsic value of a company’s stock. The buying and selling strategies are based if the stock is trading at a premium or a discount as compared to its fair value. The value of the security is determined by analyzing a company’s revenue and earnings. Fundamental analysis is a long-term approach and can be performed in the currency and commodity market, but many micro and macro-economic factors are studied to analyze the value of the particular asset.

The technical analysis can be used as short, medium or long term approach to evaluate investments and study statistical information such as price movement and volume to identify a trading opportunity. Technical analysts use historical data, charts, patterns, and market sentiment tries to predict the
future price movement of the security.

The basis of technical analysis is ‘Price Action’ which is a technique that allows traders to study the market and make decisions based on the recent and current price movements rather than solely depending on technical indicators. Price action is used to formulate chart patterns and also calculate moving averages that can help traders’ project future trade.

Price action integral part of technical analysis as it is closely linked with the supply and demand dynamics, which outlines the value of the stock. Price action is interpreted by using charts where the price is plotted over time. Investors use different chart patterns to identify a trend and use their instinct to spot upcoming trends, breakouts, and reversals. Many times the patterns more or less look the same as investors often behave similarly when there is a Bullish or Bearish trend in the market.

Market sentiment is another feature of technical analysis and shows the impact of emotions and sentiments of the investor on the market trends. Technical analysis can be performed on all types of security that have historical trading data. Some of the markets where technical analysis can be applied are stocks, currencies, commodities, futures, and fixed income. The three general assumptions of technical analysis are

  • All fundamental factors to market factors and market psychology are already valued in the stock, the only thing remaining is studying price movements which are determined by supply and demand of particular stock
  • The stock prices always follow a trend. A stock price will not move erratically but follow a past trend
  • The price movement patterns often repeat based on market sentiment as emotions are always associated with profit and loss during trading.

Tools Used in Technical Analysis

In fundamental analysis, the complete performance of the company is analyzed, and data and information are taken from the company’s financial statements. The company’s Balance Sheet, Income Statement, and Cash Flow Statement are studied to calculate ratios that reflect the earnings, future growth, and performance of the company. Economic factors and interest rates are also taken into account.

The technical analysis is a broad subject, and there is the use of all kinds of charts to see price movements such as line charts, candlestick charts, and bar charts. Market sentiment is another feature of technical analysis, and some of its indicators are CBOE Volatility Index (VIX), High Low Index, Bullish Percent Index (BPI, Put/Call Ratio, and Moving Averages.

The indicators that technical analysts examine are

  • Chart patterns
  • Price trends
  • Support and resistance levels
  • Moving averages
  • Volume and momentum indicators
  • Oscillators

The price movement is tracked on the chart and use of patterns and trend lines to predict where the price will move in the future. The important aspects for traders to study include supply and resistance levels, previous highs and lows of price, moving averages, and past levels where the price could not move above or below a certain level.

Advantages of Technical Analysis in Stocks

  • Short-term approach on stocks which are deeply analyzed
  • Many of the tasks are automated and done by using innovative software and applications
  • Ability to form risk and reward profiles
  • The supply and demand, and market sentiment can be examined through a chart
  • Applying strategies that suit the market conditions
  • Improves timing when it comes to buying options or selling short.
  • Trade within a range
  • Learn about the stock price from a trading history

Technical Analysis Forex

The technical analysis of the Forex market is similar to that of the stock market and involves identifying a pattern on a price chart. The traders look for different price patterns, which include flags, triangles, and double bottoms. The trader will select the entry and exit points based on the pattern. The technical traders will look to place a stop loss on the recent lowest low and then wait when the market makes higher highs and higher lows before placing a long trade.

The key points that the trader will study from the price chart include trend, price action, and support and resistance levels. Some additional tools that are used for technical analysis of Forex include indicators and oscillators, along with moving averages, relative strength index, Bollinger Bands, and stochastic.

The technical analysis can help traders to know which currency pair to trade and in which direction. The traders use support and resistance levels, key levels, and indicators to identify the growing and upcoming trends with accuracy among the strong and weak currency pairs. The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.

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