technical analysis

Technical analysis is one of the most important methodologies to forecast the price of shares/ scrip based on statistical trends gathered from trading activities such as price movement, volume, and open interest. It differs from the Fundamental Analysts, who attempt to evaluate a security’s intrinsic value with the help of financial statements such as Balance Sheet, Profit & Loss Statement, Cash Flow Statement, etc. Technical Analysis methodology includes different tools like Price Patterns, Candlestick Patterns, Indicators & Oscillators, Elliot Wave Theory, Harmonic Patterns, etc. to predict the probable future price and direction of securities.

History of Technical Analysis

The aspect of Technical Analysis began to emerge in the 17th century, in the Amsterdam-based merchant Joseph de la Vega’s accounts of the Dutch financial markets. In Asia, it believed that the technical analysis method was 1st used by Japan-based rice merchant Homma Munehisa during the early 18th century. He used this technique to forecast the price of rice and considered as the father of the candlestick chart (a technical analysis tool today).

The modern Technical Analysis is based on the collected writings of Charles Henry Dow, the co-founder, and editor of Dow Jones. He considered the father of modern Technical Analysis and developed a theory, later called Dow Theory, which expresses his ideas on price actions in the stock market. In the 20th Century, other prominent pioneers of Technical Analysis like William P. Hamilton, Robert Rhea, Ralph Nelson Elliott, William Delbert Gann Richard Wyckoff, etc. developed their respective techniques.

Assumptions of Technical Analysis

The Modern Technical Analysis methodology is based on the following 3 assumptions derived from Dow Theory:

  1. Price discounts everything.
  2. Prices usually always move in trends and
  3. History repeats itself over time
Advantages of Technical Analysis

The Technical Analysis methodology is used for both long terms as well as short term scenario analysis in the equity, commodity & Forex segments. Its popularity increasing day-by-day due to the following advantages: 

1.      Helpful in trend Identification

Technical analysis helps in trend identification and benefits in trading decisions. As per the rule, if a stock is making higher highs and higher lows, it considered in the uptrend. Vice-versa, if it making lower lows and lower highs, it considered in the downtrend. A consolidated move in a range considered a sideways trend. A trader prefers to trade in direction of trend (until no reversal signal available) after analysing the trend in different time frames (as per the traders’ trading horizon) to maximize the gain.

2.     Measures the strength of the existing trend

Technical indicators, volumes, candlestick patterns, etc. helps in identifying the strength of the current trend. If a bullish or bearish trend is not accompanied by good volume or if there is a falling volume chart during the sharp trend, it indicates a low strength of the trend. Other than volume, different indicators like ADX, Moving Average, RSI, MACD, etc. are also very helpful in measuring the strength of the current trend and helps in profitable trading

3.    Generates early signals for a trend reversal

One of the most prominent features of technical analysis is that it provides early singles of a trend reversal. The most common and important tool used for identification of trend reversal is candlestick patterns. Different candlestick patterns like engulfing, harami, morning star & evening star, piercing line & dark cloud cover, etc. predict the trend reversal with high accuracy. Other than candlestick patterns, different price patterns like the double top, double bottom, head & Shoulder, reversal head & Shoulder, and cup & handle are also useful tools for trend reversal identification

4.    Provides proper entry & exit levels

With the help of technical analysis tools like support & resistance levels, Fibonacci retracement, price patter neckline, candlestick patterns, trend line, etc. it’s easy to identify the entry and exit level in the market. These entry and exit levels help to increase the profitability and decrease the loss due to technicality in the levels.

5.      Less complex and time saving

Technical analysis is less complex as compared to the fundamental analysis and due to this; it takes less time to analyse particular scrip. The above mentioned prominent features of Technical Analysis increasing its popularity day by day and attracting many investors to opt for it.

6.      Powerful Tool for intraday trading

When it comes to intraday or short term trading, the most powerful tool available for it is technical analysis. Fundamental analysis is mainly for investing purposes (from a minimum one year), but Technical analysis works very well for intraday & short term trading. 

The Technical Analysis creates ample opportunities for an investor as well as bright employment opportunities for those who want to plan a career in it. Some of the major advantages of technical analysis like trend analysis, proper enter & exit levels, early trend reversal signal, trend strength measure, etc. motivate traders to learn about it and use it to achieve their trading goals. If you want to learn technical analysis from the experienced and qualified faculties, you can join our Technical Analysis Basic and Advance Technical Analysis courses. These courses are available in both online & offline mode online as per your convenience.