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Introduction of Technical Analysis

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. It is a popular tool among traders and investors, as it can help to identify trends and patterns in the market that can be used to make informed investment decisions. Technical analysis is based on the idea that market trends, as shown by charts and other technical indicators, can provide valuable insights into the likely direction of prices. It is often used in conjunction with fundamental analysis, which examines the underlying factors that drive the market, such as a company’s financial performance and industry conditions. Technical analysis can be a useful tool for traders and investors, but it is important to remember that it does not guarantee success and that past performance is not necessarily indicative of future results.

Price and volume are two key concepts in the world of trading and investing. Price refers to the amount of money that is charged for a product or service, and volume refers to the number of units of a product or service that are traded in a given period of time. In the context of the financial markets, price and volume are often used together to analyze the performance of a security, such as a stock or bond. For example, if a stock has a high price and a high volume, it may indicate that there is strong demand for the stock and that investors are willing to pay a premium for it. On the other hand, if a stock has a low price and a low volume, it may indicate that there is weak demand for the stock and that investors are not willing to pay a high price for it. By analyzing the relationship between price and volume, traders and investors can gain valuable insights into the market and make more informed investment decisions.

Derivation of Price

Market/Price Action-

Price data (or as John Murphy calls it, “market action”) refers to any combination of the open, high, low, close, volume, or open interest for a given security over a specific timeframe. The timeframe can be based on intraday (1-minute, 5-minutes, 10-minute, 15-minute, 30-minute, or hourly), daily, weekly, or monthly price data, and last a few hours or many years.

Technical Analysis Working

Technical Analysis is basically the study of an asset’s current and previous prices. The main underlying assumption of technical analysis is that fluctuations in the price of an asset are not random and generally evolve into identifiable trends over time.

At its core, Technical Analysis is the analysis of the market forces of supply and demand, which are a representation of the overall market sentiment. In other terms, the price of an asset is a reflection of the opposing selling and buying forces, and these forces are closely related to the emotions of traders and investors (essentially fear and greed).

Effective Technical Analysis –

Technical Analysis is considered more reliable and effective in markets that operate under normal conditions, with high volume and liquidity. The high-volume markets are less susceptible to price manipulation and abnormal external influences that could create false signals and render Technical Analysis useless.

Liquidity- Market liquidity is the extent to which a market allows for assets to be bought and sold at fair prices. These are the prices that are the closest to the intrinsic value of the assets. In this case, intrinsic value means that the lowest price a seller is willing to sell at (ask) is close to the highest price a buyer is willing to buy at (bid). The difference between these two values is called the bid-ask spread.

 

Liquidity

Quick & Time Saving –

Quite simply, technical analysis is a fantastic tool for making and saving you money. Nowadays everyone wants to trade day by day or swing basis (10/15 Days position), here we can’t apply fundamental analysis so we need to analyze stock trends with the help of price. It saves you bundles of time (over the fundamental analyst). You will find it removes huge chunks of the ‘psychological’ game of trading and investing from the equation. It creates discipline and is essential for the risk and trade management of your portfolio – whether that be knowing when to take profits, setting stops, or getting out of bad trades.

Assumptions in Technical Analysis –

Quite simply, technical analysis is a fantastic tool for making and saving you money. Nowadays everyone wants to trade day by day or swing basis (10/15 Days position), here we can’t apply fundamental analysis so we need to analyze stock trends with the help of price. It saves you bundles of time (over the fundamental analyst). You will find it removes huge chunks of the ‘psychological’ game of trading and investing from the equation. It creates discipline and is essential for the risk and trade management of your portfolio – whether that be knowing when to take profits, setting stops, or getting out of bad trades.

Technical Analysts don’t care whether a stock is undervalued or overvalued. In fact, the only thing that matters is the stock’s past trading data (price and volume) and what information this data can provide about the future movement in security. Technical Analysis is based on a few key assumptions. One needs to be aware of these assumptions to ensure the best results.

Assumptions in Technical Analysis
1. Price Discount Everything –

Demand and supply create price and this price includes all things. Technical Analysis assumes 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.

Price Discount Everything is not the discount act of god.

Nasdaq was down before 9/11 Attack
Election result was discounted even before announce market and market moved by 27% before result.
2. Price Moves in Trend –

One of the biggest assumptions technical analysis makes is that prices follow trends and aren’t random. They follow a given trend, which can be either bullish/long or bearish/short, following identifiable patterns that tend to repeat over time. Whenever a trend is established, the underlying asset is likely to continue moving in a given direction until a new trend is established.

When it comes to price movements, technical analysts believe that price moves, in short, medium, and long-term trends. For long-term traders who hold trades for days, weeks, or months, long-term charts such as hourly, daily, and weekly charts become most valuable. Short-term traders who hold trades for minutes should pay attention to short-term charts, which can be in five- and 15-minute periods.

Market movement aren't random
3. History Tends to Repeat Itself –

The basic idea in technical analysis is that history will always repeat itself, be it in the short term or long term. For this reason, technical analysts spend most of their time trying to understand past price movements to try and accurately predict future price movements.

The repetitive nature of price movements makes it possible to predict future price movements. The repetitive aspect is based on the fact that both human behavior and human history repeat themselves.

Classic chart patterns, such as channels and trends as well as rectangles, ranges, tops, and bottoms, are some of the results of predictable human behavior. Technical analysts look for these patterns because most of the time they provide a predictable outcome.

History Tends to Repeat Itself

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Disclaimer

Mr. Chartist is solely dedicated to learning the financial market. Our objective is to improve financial literacy. Since we are practicing Technical Analysis on a personal level we will be providing chart-based study in our weekly Chartbook for educational purposes only.

Users of this website are expected to consider this as a blog only for Learning/Education and not to misread it directly or indirectly as any buy/sell recommendations.

We are not SEBI Registered Investment Advisors & Research Analysts.

Please consider the Risk involved in equity markets. We do not take any responsibility for your profit or loss.​

Chart Source– Tradingview.com

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