The two primary method to analyse securities in the stock market is through Fundamental Analysis and Technical Analysis. Fundamental analysis is studying of the financial statement of the companies to determine the value of the company using various forecasting methods to conclude which is the right price to enter a particular stock. Technical analysis people assume that the fair value of the stock is already factored into the stock and it uses price movements on the chart to predict the future price of the stock.
Technical analysts believe that all the information regarding the company is publicly available and all the information available in the stock market are already factored in the stock price.
Technical analysis may look very hard on the outlook but in simple terms, it is a movement of price plotted on a time series chart. The people who study charts are also called as a chartist. The main benefits of Technical Analysis is it gives an overview of a stock idea and includes important information which includes:
- Entry Price
- Exit Price
- Expected Holding Period
What is Technical Analysis of Stock Market?
Technical analysis believes that the movement in prices is caused by demand and supply. This concept is very similar to the daily price movements of vegetable prices on a daily basis. If you notice during the time of harvest that is when new corp arrives the price of the vegetable is all time low. Reason being there is very high supply. Vice versa offseason the supply of the vegetable is very low whereas the demand is the same, limited supply, leads to rice in the price of the commodity.
The price is determined by the demand and supply of the stock. If the demand is more that does not signify that the stock is invaluable. Vice versa also stands true.
Technical analysis is a research technique where one can predict the price movement. Based on the prediction one can take trading positions. Technical analysis is the basis on which stock trading is done. Stock Trading cannot be done with fundamental analysis. As it is right quoted,”[S]tock Market is voting machine in short-term and weighing machine in long term”
Technical Analysis Premises
Technical analysis is a key component of Winning Trading Plan. Technical analysis is very often compared to get quick rich scheme and getting rich faster. Also, technical analysis is often also regarded as dealing with futures and options which is only partially true. The efforts required for learning technical analysis is not less but it’s easy.
If you do not have any plan while trading using technical analysis it can be fatal. It is very important that you create your own trading plan. If your perception of technical analysis is wrong, quick rich method, you have already started a lost war.
Technical analysis is very robust in nature. It can give your trading signals right from very short-term trades to very long-term trades. Most people like technical analysis because of this reason. In a glimpse of a chart, one can say if the stock price is going upward direction or downward direction.
Technical analysis gives you an opportunity to analyses when is the right time to enter the stock. The reason behind everyone saying that timing is everything in the stock market is this. Right entry can make your work half done.
If you are a fundamental analyst; you take your decision based on fundamentals of the company, [O]ne can always recalibrate their decision with technical analysis.
The exit is as important as an entry. Technical analysis not only gives you the opportunity to decide upon the entry but also the right time to exit the trade. There are several trend reversal techniques one can use to exit the trading position profitably.
The exit strategy is important becuase this is what brings money to your table. A wrong exit. strategy and you would be leaving a lot of money on the table. The importance of exit is a very thin line between realised and accrued income. For you to enjoy your income one would have to realise the same.
The focus of winning trading plan is totally on profitability. Technical analysis gives you the right risk to reward ration. Trading inherently being a high risk and high reward affair. Based on your risk to reward ratio one can analyse if it is worth to take the trade.
Usually, in our winning trading plan we cap the downside and left the upside flow. We cap the maximum risk one should take but there is no limit to maximum profit one should take.
Most people assume the losing money in trade is Risk.
There is no trader in the world who does not lose money in trading. The risk is when you lose the entire capital. The risk in terms of technical analysis is volatility. There are three types of volatility which one should understand to predict the stock price to its advantage: Standard Deviation, Beta & Implied Volatility.
One will be able to manage and handle trades better with proper risk Management. Your winning trading strategy should be capable of handling continuous 10 losing trades.
Expected Holding Period
Successful trader not only focuses on profitability but also return on Investment. You might be trading very profitably while calculating at the end of the financial year you might have realised on 7% of the return on investment. In that case, the time, money, energy and risk taken is not worth. Because if the same amount if you had kept in a Fixed Deposit you would have got better return risk-free.
When we check the risk to reward ratio we can predict the holding period of the stock. Usually, high holding period should give you higher returns when compared to low holding period.
Technical Analysis is not as difficult as you think.
If none of the above benefit appeal to you than Stock Trading is Not Meant for you.
At the end of the Day always remember that trading is just a part of your Portfolio, you cannot put your entire amount for stock trading. Technical analysis is the way forward. Once I learnt Technical Analysis, once I did, never had to look back again.
Come back here and tell us about the before-and-after. I bet you’ll have something to say!
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