Technical Analysis can be defined as an art and science of forecasting future prices or a method of evaluating securities by analyzing statistics based on the past prices and volume. Technical analysis is no astrology for predicting prices and intrinsic value, but is based on analyzing the current demand-supply of commodities, stocks, indices, futures or any tradable instrument using charts and other technical tools to identify patterns and mass psychology that can suggest future activity.
Technical Analysis will help share broker to forecast prices
Technical analysts recognize the period, when prices move randomly, but there are also times when the stock moves in identifiable trend, which can be identified and evaluated. Analyzing the trend will help investors make money, either by creating a long position at dip and selling at high in bullish market.
It has been observed that prices move in a pattern and price action repeats itself. Share is considered to be moving in three possible direction either always’ trending’ up, down or sideways. So, technical analysts essentially look to find out the trend followed by a particular share. Different online trading charts has been used frequently by technical analysts to help make their trading decisions.
Paying attention to the momentum or volume of stock (buying and selling) is essentially important to know the validity of the trend or to know whether it’s a reversing trend. If the trading volume increases significantly along with a rise of the price of share, the trend is probably valid. If the trading volume increases only slightly along with a little movement is the price either advance or decline, depicts, the trend is probably due to reverse itself.
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For instance, suppose a day trader notices during online trading that a particular stock every time when trends up 1%, it decline immediately after that. This has been continuously repeated almost 25 times. So, accordingly he/she evaluated that the share is following a ‘zig-zag’ pattern, where the stock with a 1% advance is immediately succeeded by a decline. Here the trader had created a signal in which he/she every time on the advance of 1% will immediately sell the stock.
The above online trading chart is of Nifty where with every advance of almost 10% it decline subsequently. Analysing these patterns will help traders to earn good profit. The blue line represents the 200-days exponential moving average and the other line depicts 100-days exponential moving average. The bars below represent buying and selling volume.
Simple Technical Tools to Identify Right Stock
A trend line is a straight line that connects two or more price points, and then extends into the future to act as a line of support or resistance. Analysing the trend could help investors identify the stocks to invest in and the right time.
There three types of Trends:
A downtrend line is negatively sloped and is formed by connecting two or more high points. Downtrend lines act as a resistance, and indicate that the net-supply is increasing even as the price declines. Investor can make profit by creating a long and short position when share is moving in the trend. Most lucrative opportunity comes, when the share is expected to give breakout either positive or negative.
An uptrend line has a positive slope and is formed by connecting two or more low points. The Uptrend lines act as a support and reflect an increasing net-demand even as the price rises. Investor could make profit by creating position, when it touches the trend line.
Sideway trend is a phase, where shares move in a range bound seeking a direction to move upward or downward. Investors could earn profits in sideways by selling and buying the shares in range.
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One of the widely used trend-following indicators during online trading is the moving averages. They make it easier to spot trends, which is especially helpful in a volatile market. The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
An exponential moving average basically weighs the most recent average prices of the stock. Exponential moving average is similar to the linear moving average, but is more responsive to the latest information than a simple moving average.
Investors simply have to plot the moving averages on the price chart. When the price of the stock rises above the moving average line, it’s a buy signal, and when the price falls below the moving average line, it is a sell signal. One can also look the 50-day moving average, the 10-day moving average and 200-days moving average. The 200-days moving average is widely accepted and is one of the best indicators.
Also Read : Moving Averages