By Veer Jhaveri
What is Technical Analysis?
Often referred to skeptics as ‘stock market astrology’, technical analysis is a tool, or method, used to predict the probable future price movement of security – such as a stock or currency pair – based on market data. If you were a fundamental analyst, you would study a company’s financial statements, such as the income statement and the balance sheet, to ascertain its growth potential. You would also try to monitor factors outside these financial statements that would increase the company’s earnings in the future. For example, you would keep track of the new businesses the company is investing in, the new markets it is entering, and the new technology it has adopted, and so on.
Technical analysis doesn’t believe in this approach. It believes that stock prices move in circles. If you can spot the section of the circle the price is currently in, you will be able to make sound investment decisions. To identify the current stage of the price pattern, you would use some analytical tools. These include various types of stock charts, some momentum indicators, and moving averages.
How is it used?
Now that you know the meaning of technical analysis let’s see the various tools that are used in it. They are:
Volume charts are one of the most widely used technical analysis tools that show the number of shares bought and sold in the market during a day. You can either use a bar chart or a candlestick chart for analysis.
They are statistical figures calculated based on stocks’ price and volume data. During technical analysis, momentum indicators act as supporting tools to charts. One of the objectives of technical analysis is to confirm your views about a stock and momentum indicators help you do it with ease. The most widely used momentum indicator is the RSI (Relative Strength Index)
Another technical analysis tool, with moving averages you can eliminate sharp and frequent fluctuations in a stock chart. Note that sometimes there could be sharp movement in stock prices within a short period. This makes it difficult to predict the trend. Moving averages help remove its impact and make the trend more prominent.
Does it really work?
Yes, Technical Analysis works and it can give you an edge in the markets. However, Technical Analysis alone is not enough to become a profitable trader. In the short term, with the right tools and composure, technical analysis can be a trader's greatest tool. However, it could also destroy your portfolio, if not implemented with the right judgment.
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