All about Technical Analysis

When we do trading in the stock market, we buy any company’s shares by looking at its price and we want to make a profit in the short term. In the short term, the prices of shares fluctuate very quickly. In such situations, it becomes very difficult to get an idea at what price we need to trade to attain lots of profit.

To solve this problem, Technical Analysis was introduced. Technical analysis uses price history charts and statistical data to analyse and anticipate price changes in the financial industry.

Three basic assumptions used to develop Technical Analysis

 1.  Everything is discounted at the market

It simply means that one company's share price includes every decision, movement, and change in the company policies at any point in time.

 2.  Stock prices follows the trend

It means that every share price moves in trends. In simple words, every share price increases or decreases based on a pattern or trend. This assumption means the share price, which is already moving in a trend in the future, has more possibility to move in that trend only. Three types of movements are as follows:

• Uptrend

In an uptrend, the price of a share increases in a pattern.

• Downtrend

In Downtrend, the price of a share decreases in a pattern

• Sideways

In sideways, the price of a share moves in a fixed range

 3.  History tends to repeat itself

In Technical Analysis, it is always assumed that in the stock market, history always repeats. It simply means any share prices changed in the past in any condition in the future will change in the same situation. In this, the prices of shares constantly change based on investors' emotions.

Pros and Cons of Technical Analysis

Pros

1. The skill to effectively analyse data
   • Technical analysts use diagrams that depict historical data
   • Traders can receive a distinct view on price movements that they'd never get from   fundamental analysis because it's visual.
   • By reviewing the data, traders can make informed conclusions about what is likely to occur in the market. They can analyse how market psychology and individual emotions influence stock fluctuations.
2. Identify a trend fast.

• Technical analysis can be used to identify a stock's trend over various time frames swiftly. This contrasts with the lengthy research that primary data necessitates.
• Technical analysis can help you determine whether a stock is an upswing, downturn, or consolidation. It can use data to make investment choices, and potentially restrict your risk.

Cons 

1.  It isn't always correct

• You can build trade plans which fail even if you're an expert at it
• Let's say historical evidence indicates that a share is likely to rise at a given price. Perhaps the stock will break past support.
• You need to keep track of and analyse your trades.

2.  Singles are mixed

• Analysing is both an art and a science. You can utilize many technical indicators as indications to purchase or sell stocks in the science section.
• These indications have the potential to be correct. Even the most excellent indications, however, will occasionally fail.
• You can increase your ability to look at all of the data as a whole by learning and gaining experience. Then pick wherever you want to focus your efforts so you can make better selections.

Final Conclusion

The technical analysis is a way of investment style comprising various indicators and strategies. Moreover, the investment style may differ with respect to the time frame as well. The best thing that works out in this investment style is strictly following risk-reward ratio. It is also imperative to have patience to gain experience and expertise in it. There are many traders globally which follow this investment style and reap benefits.

Customer Notice:

Nextgen Global Services Pty Ltd trading as Kapitales Research (ABN 89 652 632 561) is a Corporate Authorised Representative (CAR No. 1293674) of Maven Capital Pty Ltd (AFSL No. 418504). The information contained in this article is general information only. Any advice is general advice only. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of this product for your circumstances. Please be aware that all trading activity is subject to both profit & loss and may not be suitable for you. The past performance of this product is not and should not be taken as an indication of future performance.

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