Technical Analysis and the Fundamentals of Technical Analysis

Technical analysis of stocks is the study of the historical data of stocks, including volume and price.

A stock (also known as equity) is a security that represents the ownership of a fraction of a corporation. This entitles the owner of the stock to a proportion of the corporation’s assets and profits equal to how much stock they own. Units of stock are called “shares”. Stocks are bought and sold predominantly on stock exchanges, though there can be private sales as well, and are the foundation of many individual investors’ portfolios.

In the investing world, the term “bull” and “bear” are frequently used to refer to the market conditions whether it is appreciating or depreciating. The bull market is the rising market where the economy is sound while the bear market is declining where the economy is receding.

Now to study this upward and downward moment of the market, technical analysis is done.

What is Technical Analysis?

Technical analysis is the study of charts, patterns and statistical figures to understand market trends and pick stocks accordingly. Using insights from market psychology, behavioural economics and quantitative analysis, technical analysts aim to use past performance to predict future market behaviour. Like weather forecasting, technical analysis does not result in absolute predictions about the future.

Technical analysis is applicable to stocks, commodities or any tradable item to study price fluctuation and trend.

Trend & Price Indicator

Traders believe predicting any stock price action using past and the present trend is most reliable with technical analysis.

Through technical analysis, we can easily see the pattern or trend followed by the stock in a time frame. Some popular time frames are:

• 15 minutes
• Hourly
• Weekly
• Monthly

Some Broad Features

• Some technical analysts believe that price movement is repeated. Historical price movement is repeated after a particular time frame. So they study the historical charts, look at price and volume information and then using trends, they try to figure out how the stock’s price may move in the future.
• If there is a high liquidity flow, it allows traders to trade fast and easily as there are very few chances of price change of stock in a small-time period. But on the contrary for low liquidity, trading is very difficult as price changes very rapidly with every single investment.
• A technical analyst cannot predict sudden event which affects price change. Like if any company’s CEO is dying or any terrorist attack or any global disaster which will eventually affect the stock market. So in any of these cases, the analyst has to watch the market patiently until the charts settle down to study the price trend.

Fundaments of Technical Analysis

The Dow Theory is considered to be the foundation of technical analysis. The Theory classifies market trends into primary, secondary and minor. The primary trend lasts for one to three years and contains, within it, several secondary trends. Secondary trends have a life of only a few months. Minor trends last for under a week. Many minor trends join to form a secondary trend.

According to Dow’s Theory, for a trend to be real, market movements should supplement each other. This is because most stocks are related to each other in some way. If one moves up, the other should too. If this doesn’t happen, it is a sign that a trend is not stable. Then reverse trend is to be considered.

Authored by Sakshi Jain