What is Technical Analysis?
Generally stock market analysis falls into two broad categories. i.e. Fundamental Analysis and Technical Analysis. Now we are going to take a look at the Technical Analysis of the stock market. Very simply put, Technical analysis can be identified as the process of analyzing the price movements and volume movements of a stock and predicting the future movements based on the results. This maybe a kind of too 'modest'. ;)
So let us look in depth.
Technical analysts use charts, graphs, lines, regressions, trade patters etc. to help their Technical analysis. It is fair to say that all of these are done using the historic and real-time data of prices and volumes of a particular stock, and thus justifying the simplified explanation I provided above. Technical analysis includes the study of many tools like 'Relative Strength Index', 'MACD', 'Average Directional Index', 'Commodity Channel Index' and many more.
Before jumping into the advanced areas of Technical analysis, there are a few concepts a technical analyst must know.
Important Concepts associated with Technical Analysis
- Resistance - a level of price that stops/prevents the price from moving beyond that point. It may act as a 'Price Ceiling'. This is not permanent however.
- Support - a level of price that stops/prevents the price from moving/dropping below that point. This acts as a 'Price Floor'. This too is not permanent.
(Both Resistance and Support could be broken and when that happens a significant price increase or decrease can be witnessed.)
- Trend Line - a line drawn connecting two price points.
- Channel - a pair of parallel trend lines
- Moving average - a line depicting the average price movement of a stock over a period of time. Also known as MACD.
- Relative Strength Index (RSI) - used to chart or map the relative strength and weakness of a stock.
- Bollinger Bands - measures the highness or lowness of the price in relation to previous price trends.
Those are still a few concepts that are used in Technical analysis. Seems extremely difficult? Well, Yes and No. If you study each tool carefully and gain experience by using them first hand, it becomes as easy as everyday trading. The part 01 of the Technical analysis article will stop fro now. The second part will be coming soon with more about the Technical Analysis to win the stock market battle.
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