Technical Analysis is the art of identifying Trends in stock prices at an early stage and then riding those Trends until the weight of evidence suggests that the trend has reversed.
Using this technique allows the practitioner to arrive at a logical way to identify the following
- The expected risk in a trade.
- The expected reward.
- The expected holding period.
- Potential Entry and Exit Points.
Technical Analysts employ price time charts, which help them interpret what is happening in the stock price and what is the general perception among market participants regarding the stocks of a certain company.
A simple stock chart looks like this,
Technical Analysis as a field of study, is based on a few assumptions.
- Technical analysis doesn't deal in certainties but in probabilities. This field essentially tries to identify the best technical setups which would give us more wins rather than losses over a certain period of time.
- Human nature remains the same over the long term, and how the market participants respond to market forces of fear and greed also remains constant. This is manifested in price charts, and practitioners try to predict the future, based on how the market participants reacted previously to certain market conditions.
- Unlike Fundamental Analysts, Technical Analysts do not try to understand the business underlying the stock prices but just look at the price patterns on the charts. Thus, Technical Analysis can be employed across Stocks, Commodities and any other instruments where price Vs time graphs can be plotted.
Please watch our video below for a detailed explanation of Technical Analysis, its limitations and strengths.
So, this was all we wanted to convey in our first post on Technical Analysis. In our next few posts we would work on introducing more content that you must go through to become a practitioner employing technical analysis for initiating profitable trades in the stock markets.
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