In this article, Shruti Chand (ESSEC Business School, Master in Management, 2020-2022) elaborates on the concept of technical analysis.
This read will help you get started with understanding technical analysis and how it is practiced in today’s world.
What is technical analysis?
Technical analysis is a tool used to predict future price movements and trends of security. This type of analysis is based on historical market data (both transaction prices and volumes) using various methods to help traders and investors in their decisions to buy and sell securities.
Investors perform technical analysis because sometimes, fundamental analysis may not always reflect the market price. In other words, the market may not be efficient from an informational point of view. Since technical analysis uses statistical and behavioral economics, it guides traders to what is most likely to happen. Hence, in real-life scenarios, investors usually use both technical and fundamental analysis to make decisions.
While fundamental analysis involves evaluating the intrinsic value of a company based on external events, market study, financial statement analysis, industry trends to name a few. Technical Analysis, on the other hand, relies on market movement more than the intrinsic value of the investment.
How is Technical Analysis different from Fundamental Analysis?
Unlike fundamental analyst, the overvaluation and undervaluation of a stock does not influence the behaviour of a technical analyst. Since Technical Analysis is concerned with price action, all decisions are based on the market movements rather than considering industry trends and company performance as technical analysts are really looking to
make money based on the stock market performance of a stock based on price trends.
Since technical analysis is statistical in nature, it is based on various
assumptions. It is very important to keep these assumptions in mind to
be able to perform technical analysis for investing:
- Market discounts itself: All the prices in the markets are a reflection of known and
unknown information present with the investors in the stock
market. The market takes into account all these factors and hence, price
is always a reflection of this information.
- History repeats itself: Technical Analysis is a historic representation
of price movements. It assumes that the history of the previous record
of prices will be repeated in the future. It is based on the actions
that investors take in an upward trending market, people tend to go
long and vice versa.
- Trend influences price: Technical analysis studies and identifies
trends in the market on the basis of which decisions are made.
Since it is assumed that these trends will be reflected in the price,
only then does technical analysis and its actions make sense.
How can you start Technical Analysis?
A lot of you all might wonder how can you start and eventually make money while practicing technical analysis. These simple steps can help any beginner:
There are various technical indicators that help technical analysts to identify market trends:
While it is important to keep in mind that no technical analysis is perfect, there are some tried and tested common charts that Investors use various charts to help them predict future market movements, some of the most common ones are:
1. Line Chart
2. Bar Chart
3. Candlestick Chart
4. Renko Chart etc
And many more…
Moving average is a technical analysis tool that helps investors smoothen the price movements data by a frequently updated average price. Since minor and major movements in stocks over a really brief period of time can influence technical analysis results, a moving average is calculated to better predict actions.
MA are customizable and the time frame is based on the discretion of the analyst. The most common time frames that investors use are 15, 20, 30, 50, 100, 200 days.
Relevance to the SimTrade certificate
With basic technical analysis, you can start trading in the markets through Online Brokers or through the Simtrade Platform to enhance your learnings.
- By taking the market orders course , you will know more about how investors can use various strategies to invest in order to trade in the market.
- By launching the series of Market maker simulations, you can extend your learning about financial markets and trading approaches.
About the author
Article written by Shruti Chand (ESSEC Business School, Master in Management, 2020-2022).