Technical Analysis of Stocks in English

Technical Analysis of Stocks in English

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In a volatile equity market, every investor wants to use the best method to analyze stocks. Technical analysis is generally used to know the movement  in the stock  market . It is an analysis to identify short-term value. 

Technical analysis of stocks is the study of a stock’s historical data including volume and price. The purpose of technical analysis is to use the past behavior of a stock to predict its future value.

It is very important to do research to get better returns in the stock market. For this , there should be information about Share Market Analysis in Hindi .

In this post, we have talked about technical analysis, how an investor does the right technical analysis of a stock.

Let’s get started.

What is Technical Analysis?

Technical analysis of stocks is a method of analyzing stocks using historical chart patterns of publicly available stocks. This method of analysis is primarily associated with equities but can also be used for a few different types of securities.

In other words, technical analysis means, by understanding the past trends of charts and volumes and using other technical indicators to predict the behavior of the stock price and find out the movement in the future. It is commonly used by short-term traders who want to make very quick money by observing patterns in stock prices.

They are not concerned with the condition of the company and are not interested in knowing the fundamentals of the company before investing in it. Technical analysis developed from the principles of Charles Henry Dow , who is known as the father of technical analysis.

How is technical analysis different from fundamental analysis?

Fundamental analysis focuses on the company’s financial, management and economic policies etc. With a change in the numbers of the company’s financial position, the stock’s value changes in the future. This is the common method used by stock participants to analyze stocks.

On the other hand, technical analysis focuses on past price chart patterns and predicts the future price of a stock.

Both fundamental and technical analysis are used to forecast the future price of a stock but different data are used for analysis .

Technical Analysis – The Basics

The stock price reflects all known and unknown information already in the public domain :

According to this theory, all factors affecting the stock have already been included in the current stock price. Therefore, it is safe to assume that the current stock price is of fair value. It is neither weak nor overvalued.

It is possible to track the price movement by:

The underlying assumption means that the movement of any stock’s prices can be predicted. Although there are some random movements, the stock market is also full of recognizable trends.

If detected at the right time, the trader can make huge profits. The whole theory of technical analysis revolves around ‘trends’.

History repeats itself back:

It is fairly clear after reading the first two assumptions that technical analysts believe that people react to price movements in remarkable ways. For example: In bull markets, traders want to earn as much money as possible and thus, continue to buy despite the high prices.

Similarly, in bearish markets, people tend to have negative emotions and focus on selling, even though prices are quite low at that time.

Now, let us discuss the ways in which price movements are monitored on a daily basis to understand the trends. There are four types of prices recorded during the day:

Open : When the market opens in the morning, the first price to be executed during trading is.

High: This is the highest price the trade can execute during the trading day.

Low : This is the lowest price at which a trade is executed during the trading day.

Closing Price : This is the last price at which the market closes. This is an important indicator that shows whether the market was bearish or bullish today. If the open price is less than the closing price, then the market is considered bullish and if the closing price is less than the open price, then the market is considered bearish.

How to do technical analysis of stocks?

Following are the seven important steps of technical analysis to understand the Dow principles of technical analysis. These principles are propounded by Charles Henry Dow, who is the founder and co-founder of The Wall Street Journal and Dow Jones and Company respectively. Three of the Dow’s Investing Principles are  a good guide for technical analysts.

The following are the principles that explain how technical analysts use them:

Stock market reflects all known information

According to the first principle; The stock market reflects all known information. Known information refers to all information that is publicly available by any means. Technical analysts do not take any financial information for analysis.

They themselves do not add to the price-to-earnings ratio (P/E), return on equity ratio, shareholder equity or any other ratios such as that of fundamental analysts.

Price trends can be detected by:

According to this principle the price movement of the stock can be identified and charted. Everyone knows that prices move up and down and there is no definite pattern. But according to the theory, this does not always happen, the price movement sometimes repeats itself or moves in a known trend.

Once you understand the trend, making money becomes quite easy. You can go with the strategy of buying at low price and selling at high price. Also, you can create good position for futures trading.

history repeats itself

This theory states that the history of the stock market repeats itself. Meaning investors and market players react in the same way as they reacted in the past due to the same situation, news or announcements of the company.

Therefore, technical analysts use their knowledge of how traders have reacted in the past and what effect the stock has had.

focus on a short term

Technical analysis of stocks focuses on short periods of time, such as a month at most and 1 minute at a minimum. Since the objective of fundamental analysis is long term investment, but in technical analysis, the focus is on short term.

This method of analysis suits you best if you want to make money in the short term or want to buy and sell again.

Charts and graphs to use for stock price trends:

Technical analysis of stocks uses charts and graphs to read spot price trends. A chart tells you a lot about the trend of price movement. Where the current price of the stock is the headline, it can be easily estimated through charts. Trends can be classified by duration and type.

Uptrends

The upward movement is known as an uptrend. Daily the stock price moves to a new high and then falls below the same level as before. You should know that this high price is not the lifetime high price, but it could be the highest of the last day, week or month.

This steady high and low price indicates that the market is positive about the stock.

This is an indication that one can buy this stock as it is in an uptrend. Therefore, whenever the stock falls, the investor should consider it as an opportunity to buy. They don’t wait for the price to drop.

Downtrends

Downtrend refers to a pattern where the stock price continues to fall. You can notice that not only do the Peaks get lower but the Troughs

also get lower. This assures the market players that the share price will fall further. Therefore, investors can wait for a slight increase in the price to sell their current positions.

At this point of decline, investors do not prefer to buy further because of their downward trend. If you are a short term investor then this would be a disadvantageous position for you to buy, but if you are a long term investor you can wait for the price to fall a bit higher.

Horizontal / Sideways Trends

Horizontal  Trends is a trend that does not have a fixed trend. Only Peaks and Troughs are stable. But, you cannot decide where to buy or sell the stock.

Understanding the Support and Resistance Concept

Support and resistance are two concepts of a stock’s price movement in technical analysis. The stock price stops and reverses at a certain predetermined price level. Support is a price level where the price movement stops the downward trend. At this point the stock price has stopped falling and forms a support line where the stock is expected to rise.

Resistance refers to the highest price of a stock where traders start selling again and the stock price starts falling again. Once the areas of support and resistance are identified, trading becomes easy for you. As soon as the price reaches either of these points, two possibilities arise.

Firstly, it can break that level and move up or down and rebound when it touches the support or resistance level.

Pay attention to trading volume

To be sure of the stock price trend, the volume of trades must be observed. You can find out more about the stocks in the market through trading volumes. If the volume increases with the increase in the stock price, the trend is probably valid. And, if the trading volume increases only slightly, it is probably due to the reverse trend.