Investors and traders are generally taking their decision on any counter (stock) for entering/exiting/hold based on either technical or fundamental analysis. Many smart investors use fundamental analysis to choose stock but when they enter or exit from that stock that decision they take based on technical analysis. So what to choose is based on fundamental analysis and when to enter or exit into/from a counter is based on technical analysis.
Now, what is technical analysis? What are tools in technical analysis? Technical analysis basically a method of analyzing supply and demand of a stock or other tradable items on the exchange.
The methods of analysis:
a) Study different charts of stock price:
It helps to understand the price movement pattern in past.
i) Line Chart
ii) Bar Chart
iii) Candle Stick Chart
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b) Pattern Study:
Here two things need to understand. These two are support and resistance.
These two forms when demand and supply meet each other and reverse happens. Suppose in case rally (uprising of stock price) buyers are dominating in the market but when it keeps on continue more sellers join in the rally because the price is rising but buyers started leaving as the price is not attractive. So gradually buyers and sellers meet each other and price reach at its resistance level then it gradually sellers exceeds buyers and price start falling when buyers could not maintain the force for price rises. In a case of support reverse things will happen.
c) Indicators & Oscillators:
It helps the investor to be alert, confirm and predict the trend of the overall price movement. Investors can understand the strength and direction of the counter. Actually, there are two types of indicators. One is leading and another one is lagging. Leading indicators help investors to know the entry and exit point. Investors can get an indication of price reversal. Whereas lagging indicators will help you to understand the overall trend, not the price reversal.
Leading indicators: Momentum, CCI, RSI, Stochastic Oscillators and Williams %R
Lagging indicators: Moving average, MACD
d) Dow Theory & Eliot Wave Theory:
Dow theory (Charles H Dow-1851-1902) is said on his six basic principles
1. The stock market discounts all information available
2. It has three trends- primary, secondary and minor.
The methods of analysis:
a) Study different charts of stock price:
It helps to understand the price movement pattern in past.
i) Line Chart
ii) Bar Chart
iii) Candle Stick Chart
Image source: www.moneycontrol.com
b) Pattern Study:
Here two things need to understand. These two are support and resistance.
These two forms when demand and supply meet each other and reverse happens. Suppose in case rally (uprising of stock price) buyers are dominating in the market but when it keeps on continue more sellers join in the rally because the price is rising but buyers started leaving as the price is not attractive. So gradually buyers and sellers meet each other and price reach at its resistance level then it gradually sellers exceeds buyers and price start falling when buyers could not maintain the force for price rises. In a case of support reverse things will happen.
c) Indicators & Oscillators:
It helps the investor to be alert, confirm and predict the trend of the overall price movement. Investors can understand the strength and direction of the counter. Actually, there are two types of indicators. One is leading and another one is lagging. Leading indicators help investors to know the entry and exit point. Investors can get an indication of price reversal. Whereas lagging indicators will help you to understand the overall trend, not the price reversal.
Leading indicators: Momentum, CCI, RSI, Stochastic Oscillators and Williams %R
Lagging indicators: Moving average, MACD
d) Dow Theory & Eliot Wave Theory:
Dow theory (Charles H Dow-1851-1902) is said on his six basic principles
1. The stock market discounts all information available
2. It has three trends- primary, secondary and minor.
3. The primary trend has three phases.
Accumulation phase: Here investors believe price of the stock is undervalued and attractive and its a start of bull market
Participation phase: At this phase public sentiment is increasing and more investors and traders are participating during this phase
Distribution phase: At this phase, there is too much euphoria among the investors and traders that market will not fall. But investors who invested early phase they started selling and start booking profit.
4. Stock market indexes must confirm each other.
5. Volume must confirm the trend
6. The trend remains intact until and unless clear reversal signals occur.
Elliot wave theory: It says stock prices has two kinds of clear trends.
Dominant trend (It has five wave patterns)
Corrective trend (It has tree patterns)
Technical analysis consists of all those things discussed. Each method itself big subject. Sometimes confusing to apply in practical life. Investors have to understand which will be effective for which counter. So it needs experience and practice to learn and succeed in share market.
Accumulation phase: Here investors believe price of the stock is undervalued and attractive and its a start of bull market
Participation phase: At this phase public sentiment is increasing and more investors and traders are participating during this phase
Distribution phase: At this phase, there is too much euphoria among the investors and traders that market will not fall. But investors who invested early phase they started selling and start booking profit.
4. Stock market indexes must confirm each other.
5. Volume must confirm the trend
6. The trend remains intact until and unless clear reversal signals occur.
Elliot wave theory: It says stock prices has two kinds of clear trends.
Dominant trend (It has five wave patterns)
Corrective trend (It has tree patterns)
Technical analysis consists of all those things discussed. Each method itself big subject. Sometimes confusing to apply in practical life. Investors have to understand which will be effective for which counter. So it needs experience and practice to learn and succeed in share market.
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