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What is Technical Analysis?

Technical Analysis can be defied as the study of market activities and action, mainly using charts for the purpose of forecasting or predicating the future price trends. Here “market activities” refer to the changes in the price and volume of stock.

Technical analysis is mainly used by Trades (i.e people of often buy and sell stocks for Intraday or Swing basis) and not for Investors(i.e people how invest in a company for 3-5 years) to identify what is the next trend that the stock is going to make. It can be tough of a torch that guides a Trader to make profits in dark.

Over the time there have been many types of Technical charts have been developed, the main contributors to Technical analysis have been the Japanese, their major invention was the Candlestick Charts that are mostly used now-days by almost all Traders and Technical Analyst.

Technical Analysis supposes markets have memory. If so, past prices, or the current price momentum, can give an idea of the future price evolution. Technical Analysis is a tool to detect if a trend (and thus the investor’s behavior) will persist or break. It gives some results but can be deceptive as it relies mostly on graphic signals that are often intertwined, unclear or belated. It might become a source of representativeness heuristic (spotting patterns where there are none)

Chart formations tell stories which only technical analysts could read. Examples are double top formations which signal a potential decline in the price of the particular stock. Double bottom is the opposite signal illustrating a stock ready to advance in price. Technical analysts use such chart formations to enter or exit their positions.

Technical analysis is a form of analysis which seeks to make judgments about the performance of a share based solely on its historic and current price behavior and without reference to the underlying business, the sector the company’s in, or the economy as a whole.

There are many instances of investors successfully trading a security using only their knowledge of the security’s chart, without even understanding what the company does. However, although technical analysis is a terrific tool, most agree it is much more effective when used in combination with fundamental analysis.

After the end of this Pathshala you shall be familiar with all the techniques used by various Technical experts to understand charts.


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