All about Technical Analysis. Beginners guide to technical analysis.

Technical Analysis is a technique that allows you to do a well-researched analysis and develop your own point of view about the stock market to identify trading opportunities in the stocks dependent on the activities of market participants, price indicators, carts and so on. The activities of markets participants can be predicted using a stock chart. which involves:-

1. The price point of buying and selling stocks.
2. Risk involved.
3. Expected reward.
4. Expected holding period.

where you can look for opportunities based on the ongoing trend or the preference of the market. It not only helps you develop a point of view on a particular stock or index but also helps you define the trade keeping in mind the entry, exit and risks related to it. And today technology makes it easy to understand. 

Rules to follow in the Technical Analysis (TA):-

(If you approach TA as a quick and easy way to make money in the Financial Markets, trading catastrophe is bound to happen.)

• For Trading  – TA is best used to identify short term trades like intraday or swing trade. I prefer not using TA to identify long term investment opportunities. Long term investment opportunities are best identified using fundamental analysis. Also, If you are a fundamental analyst, use TA to calibrate the entry and exit points.
• Return per trade - Please do not expect huge returns within a short duration of time using Technical Analysis. The trick with being successful with TA is to identify short term trading opportunities which can give you small but consistent profits.
• Holding Period – Trades based on technical analysis can last anywhere between few minutes and few weeks, and usually not beyond that. We will explore this later in this article.
• Risk – Often traders initiate a trade for a certain reason, however in case of an adverse movement in the stock, the trade starts making a loss. Usually in such situations, traders hold on to their loss-making a trade with a hope they can recover the loss. Remember, TA based trades are short term, in case the trade goes sour, do remember to cut the losses and move on to identify another opportunity. Do not hesitate to make a loss if it is necessary.

The assumptions in Technical Analysis:-

1) Markets discount everything – This assumption tells us that, all known and unknown information in the public domain is reflected in the latest stock price. For example, there could be an insider in the company buying the company’s stock in large quantity in anticipation of a good quarterly earnings announcement. 

2) The ‘how’ is more important than ‘why’ – This is an extension to the first assumption. Going with the same example as discussed above – the technical analyst would not be interested in questioning why the insider bought the stock as long he knows how the price reacted to the insider’s action.

3) Price moves in trend – All major moves in the market is an outcome of a trend. The idea of the pattern is the establishment of technical analysis.

4) History will repeat itself –  In the technical analysis setting, the value pattern will to repeat itself. This happens in light of the fact that the market participants reliably respond to value developments in a surprisingly comparative manner, every single time the value moves a specific way.

At this stage, these suppositions may not be exceptionally obvious to you. I will explain them in greater detail as and when we will come to that topic.

Below are some of the chart types:-

1. Line chart
2. Bar Chart
3. Japanese Candlestick (Most important).

The focus of this article will be on the Japanese Candlesticks As candlesticks are the default option for the majority in the trading community.

Candlestick Anatomy:-

In a candlestick chart, candles can be classified as a bullish or bearish candle usually represented by blue/green/white and red/black candles respectively. Let us take a look at them:-

They can be analysed in different time frames. A time frame is defined as the time duration during which one chooses to study a particular chart. Some of them are:-

• Monthly Charts
• Weekly charts
• Daily or End of day charts 
• Intraday charts – 30 Mins, 15 mins and 5 minutes.

       "You can customize the time frame as per their requirement. And as a trader you need to choose a time frame, this is necessary if you want to be a successful trader."

Single candlestick patterns:-

1). The Marubozu:-  (Open = Low and High = close, a bullish marubuzo is formed.)

2). Doji.

3). Spinning Tops.

4). Paper umbrella, etc.

Multiple candlestick patterns:-

1). The engulfing Pattern.

2). The piercing pattern.

3). The Dark cloud cover.

4). The harami pattern, etc

These candlestick patterns are used to identify your trade, when to buy and what would be the stop-loss. A good trader will always look for these opportunities because you cannot act emotionally without any ground when you are going for a trade. Looking for the price behaviour of your stock is very crucial for you.

What are the support and resistance?

They are the price points on a chart of every stock or the indices which advises the likelihood to draw in the greatest measure of either purchasing or selling. They the one often used in determining the entry and exit points for a trader.

Resistance is something which prevents the cost from rising further. The resistance level is a valuable point on the chart where traders(investors) expect maximum supply (for selling) of the stocks and the indices. The resistance levels are consistently over the current market cost. 

Support is something that keeps the cost from falling further. The support level is a valuable point on the chart where the trader anticipates greatest interest (for buying) of the stocks and the indices. At whatever point the price falls to the support line,  it is probably going to skip back. The support levels are consistently underneath the current market cost.

NOTE:- The support and resistance lines are just characteristic of a potential inversion of costs. They in no way, shape or form ought to be taken for granted. Like anything else in technical analysis, one should consider the possibility of an event occurring (based on patterns) in terms of probability where some indicators can be used. 100% surety can never be determined through TA.

What are Volumes:-

Volumes show the number of shares is bought and sold over a given period. Affirming patterns and examples are the way to pick up experiences into how different participants perceive the market.

 As per the second assumption, (The ‘how’ is more important than ‘why’) these are the questions to keep in cheek.

How is the price increasing or decreasing?

ANS - Because market participants are buying or participants are selling.

Are there any institutional buyers associated with the price increase? 

ANS - Not likely.

How can we know that there is no meaningful purchase or no meaningful sell orders by institutional investors?

ANS - It is simple, if they were buying then the volumes would have increased and not decrease or if they were selling then the volume would increase and not decrease.

How does an increase in price, associated by decreasing volumes indicate?

ANS - It means that the price is increasing because of small retail participation (the traders) and not really influential buying. Hence you need to be cautious as this could be a possible bull trap.

How would you infer a decline in price and a decline in volume?

ANS - It means the price is decreasing because of small retail participation, and not really influential (read as smart money) selling. Hence you need to be cautious as this could be a possible bear trap.

And when you initiate a trade to either go long or short always make sure if volumes confirm. Avoid trading on low volume days. It is a good decision not to trade by a smart trader.

Indicators for Technical Analysis:-

A technical indicator helps a trader for analyzing the price movement of a stock. Indicators are independent trading systems which are introduced by the world's successful traders. Indicators are built on preset logic using which traders can supplement their technical study (moving average, candlesticks, volumes, S&R) to arrive at a trading decision. Indicators help in buying, selling, confirming trends, and sometimes also predicting them.

(Please do keep in mind that these indicators are not always fully certain, And a trader, as well as an investor, should not depend fully on their values. You need to analyze what works for you and adopt the same.)

MA (Moving averages) - Moving averages can be calculated for any time frame, from minutes, hours to years. When the stock price trades above its average price, it means the traders are buying the stocks at a price higher than its average price. This means the traders are optimistic about the stock price going higher (Maybe if a good has come). Therefore it can create buying opportunities.

RSI (Relative strength index) - The RSI is to help the trader identify oversold and overbought price areas (Also called overbought or oversold zones). Overbought implies that the positive momentum in the stock is so high that it may not be sustainable for long and hence there could be a correction (it may fall down). Likewise, an oversold position indicates that the negative momentum is high leading to a possible reversal (it may rise up). A value between 0 and 30 is considered oversold, hence the trader should look at buying opportunities 5. A value between 70 and 100 is considered overbought, hence the trader should look at selling opportunities.

MACD (Moving Average Convergence and Divergence) - MACD is all about the convergence and divergence of the two moving averages. Convergence occurs when the two moving averages move towards each other, and divergence occurs when the moving averages move away from each other. They work quite well when there is a strong trend and are not too useful when the markets are moving sideways. They can further be studied in detail. 

BB (The Bollinger Bands) - BB are used to determine overbought and oversold levels, where a trader will try to sell when the price reaches the top of the band and will execute a buy when the price reaches the bottom of the band.

Since there are multiple indicators of the stock market. And here is a big question, Should you require to know all the indicators at ones for trading?

> The answer will always be a no. They are good for every trader's knowledge but by no means should be your main strategy for trading.

Main tips for trading:-

• A recognizable candlestick pattern should be seen.
• The supports and resistance should confirm the trade.
• Volumes must be profound.
• The buying and selling prices should always be predetermined first.
• Check a few indicators. If they are in favour of your trade or not.

Technical Analysis also includes:-

1). The Fibonacci retracements and its relevance to stocks markets.

2). The Dow Theory.

3). The Reward to Risk Ratio (RRR).

4). Average Directional Index (ADX).

5). And many more tools and indicators which are not truly necessary but a part of technical analysis.