Introduction to Technical Analysis

We have seen about Investors and Traders and their investing styles in the previous articles. While Investors choose their stocks and make investments and hold them for the long term. Traders choose their stocks to trade for a shorter period. Both have their style of market analysis to choose a particular stock. There are various methods to analyze the stock market. The best-known methods are Fundamental Analysis and Technical Analysis.

Let’s look at a closer view of Technical Analysis in this blog.

According to the metrics on the website of the Bombay Stock Exchange, around 5,311 companies have listed their shares in the exchange as of January 13, 2023. As per the website of the National Stock Exchange, around 2,113 companies have been listed on the exchange as of December 31, 2022. Nearly there are more than 7000 companies listed for trading.

Imagine how will you identify,

• Stocks that are in a good buying range
• Share prices that have hit their year low
• Shares that have a good volume with more buyers/sellers
• Overall current market trend
• Performance of an Index over a particular period
• Stocks performance over multiple time frames

There is no end card for questions in stock analysis. But these questions can be answered with Technical Analysis charts.

What is Technical Analysis?

 Technical analysis is a trading technique that uses historical price and volume data of stock to forecast the future price of that particular stock. It may be assets such as equities, derivatives, commodities, and currency pairings. The basics of technical analysis have been developed by Charles Dow, who is known to be the “Father of Technical Analysis”. Technical Analysis tools can be applied to almost all asset classes. Technical Analysis is widely used among traders. Investors depend on fundamental analysis.

 The price of a stock is plotted in real-time in the chart. The chart is plotted as Price vs Time Period, while time is on the “X-Axis” and price is on the “Y-Axis”. Past prices of the stocks are also collated and presented on charts which helps us to identify specific patterns and trends over a period of time. Many time frames are used in Technical Analysis like tick, minute, hourly, daily, weekly, monthly, and so on.

Below is the Technical Analysis chart for the stock “Siemens“. The charting software used is Amibroker. Here you can see the price is marked on the Y-Axis, and the time is on the X-Axis. The chart is loaded for a 15-minute time period.

From the previous chart, we can see that around July 12, Siemens touched its peak price of about 3860. By the time of July 17, it reached its low of about 3600. There is an ample price difference for a trader to make a decision. Using the particular above time frame, he may buy Siemens @3600 on July 18 and sell it the very same day, as there is a trend reversal. Likewise, traders take trading decisions based on many technical analysis chart patterns. We will see all the chart patterns in our upcoming blogs.

Below is again the same Siemens chart but with a daily time frame.

While reading the above chart, we can see that from the beginning of the year 2023, Siemens’s price has been consistently going up. The best price level for a short-term trader would be around May 22, as there is a reversal pattern. Investors along with fundamental analysis, use technical analysis to predict the best price for their stocks to acquire for long-term investment.

Conclusion :

This is not a conclusion. Whatever we have seen is just the very basic thing about Technical Analysis. Technical Analysis is just like an ocean. There are many adventures out there to learn. Let’s take a deep dive into the sea to taste the essence of Technical Analysis.