What is Technical Analysis?

Technical analysis is based on the hypothesis that all data can affect the performance of a stock; company fundamentals, economic factors, and market sentiments are mirrored already in its stock prices.

Consequently, technical analysts do not care to analyze the fundamentals of the business.
In its place, the move towards estimating the direction of prices through learning patterns in historical market data - price and volume. Technicians deem that market activity will produce indicators in price trends that can be used to predict the direction and scale of stock price movements in the future.

There Are Three Necessary Elements In Accepting Price Behavior:

 

·       The history of past prices offers signs of the underlying trend and its direction.

·      The volume of trading that goes along with price movements offers significant inputs on the underlying might of the trend.

·      The time span over which price and volume are observed factors in the impact of long-term factors that influence prices over some time

·       The technical analysis put these three elements into price charts, points of support and resistance in charts, and price trends. By monitoring price and volume patterns, technical analysts try to understand if there is sufficient buying interest that may take prices up or vice versa.

·       Technical Analysis is a dedicated stream in itself. It involves the study of various Trends- upwards, downwards, or sideways, so that traders can benefit by trading in line with the trend.
Identifying support and resistance levels, which symbolize points at which there is a lot of buying and selling interest correspondingly, and the implications on the price of a support and resistance level is broken, are significant winding up drawn from past price movements.
For instance, if a stock price moves closer to an established resistance level, a holder of the stock can gain by booking profits at this stage since the prices are expected to draw in once it is close to the resistance level.

·       If a support or resistance is broken, accompanied by substantial volumes, it may indicate that the trend has picked up pace and supply and demand circumstances have changed.

·      Trading volumes are imperative parameters to substantiate a trend. An upward or downward trend should go together with strong volumes.
If a trend is not supported by volumes or the volumes diminish, it may point out a weakness in the trend.

·       Technical analysis alters the price and volume data into charts that symbolize the stock price movements over a period of time. Some of the charts used comprise line charts, bar charts, and candlestick charts. The model thrown up by the charts is used to identify trends, reversal of trends, and prompts for buying or selling a stock.

·       Characteristically, chartists use the moving average of the stock's price to decrease the impact of day-to-day fluctuations in prices that may make it complicated to recognize the trend.

·       Contrasting fundamental analysis, technical analysis is not disturbed if the stock is trading at a fair price relative to its intrinsic value.

·       It restricts itself to future price movements as indicated by the historical data.