What is Technical Analysis of Stocks?
Technical analysis of stocks is the study of historical market data, including price and volume. Studying and using price and quantity charts as well as other technical indicators for making trade choices. Technical analysis to use past stock price and volume information to predict future price movements. This analysis can help investors get ahead of what is likely to happen to prices over time periods like day, week and long term. Technical analysis utilizes a broad range of pricing graphs over time. Understanding and being able to use technical analysis efficiently in securities trading. It is possible to use technical analysis for short-term trading or long-term position buying.
Technical analysis is applicable to stocks, indices, commodities, futures and option any tradable instrument where the price depend upon the supply and demand. Price data refers to any combination of the open, close, high, low, volume and open interest for a given security over a specific timeframe. The time frame can be based on intraday (5-minute, 10-minutes, 15-minutes, 30-minutes, 60-minutes), daily, weekly or monthly price data.
Technical Analysis V/S Fundamental Analysis:
The technical analysis is the study of stock charts is the opposite of the fundamental approach. If you were a fundamental analyst, you would study a company’s financial statements, such as the income statement, balance sheet and its growth potential. You would also try to monitor factors outside these financial statements that would increase the company’s earnings in the future. The exact difference between fundamental and technical analysis of stocks is shown in the table below.
| Fundamental Analysis | Technical Analysis | |
| Definition | Calculates stock value using a study of a company’s financial statements, such as the income statement, balance sheet and its growth potential. | Uses price movement of stocks to predict future price movements |
| Data assembled from | Financial statements | Charts |
| Stock bought | When the price falls below the fundamental value | When a trader believes they can sell it for a higher price |
| Time horizon | Long-term approach | Short-term approach |
| Function | Investing | Trade |
| Concepts used | Return on Equity (ROE) and Return on Assets (ROA) | Dow Theory, Price Data, Technical Indicator |
Common Terms Used in Technical Analysis
Common terms used in technical analysis of stocks are follow
Average true range – The range over a certain time period
Momentum – The rate of change of price with respect to time.
Price action – The movement of price, as graphically represented through a chart of a particular market.
Support – Supports are a price level that the stock will not fall below. A price level where a higher buy orders may be placed, causing price to bounce back the level upward.
Resistance – Resistance is a price level that the stock can’t seem to rise above. A price level where a multitude of sell orders may be located, causing price to bounce off the level downward.
Breakout – When price breaches an area of support or resistance, often due to a notable surge in buying or selling volume.
Retracement – A reversal in the direction of the prevailing trend, expected to be temporary, often to a level of support or resistance.
Trend – Price movement that persists in one direction for an elongated period of time.
Cycle – Periods where price action is expected to follow a certain pattern.
Elliott wave theory – Elliott wave theory suggests that markets run through cyclical periods of optimism and pessimism that can be predicted and thus ripe for trading opportunities.
Fibonacci ratios – Numbers used as a guide to determine support and resistance.
Technical Analysis Indicators
Technical indicators involve some arithmetical transformation of price and volume data to provide an up and down movement, support and resistance levels, momentum, trend, ratio(s), and correlation, among other delineations. Some indices also define feelings such as short interest, implied volatility, ratios of putting and calling, “fear” or “greed,” etc.
Use technical analysis indicators to increase your investment returns. There are 100s of technical Indicator available in the market. In this article we see only top technical analysis indicators
Moving Average
A moving average of prices to indicate the trend over a series of values. Moving averages are a core part of technical analysis. The moving averages filter out the noise of stock chart by smoothing out price action. The most reliable moving averages are: Simple Moving Averages: 7, 13, 20, 50, 100, and 200 day
Moving averages provide support for falling prices and resistance for rising prices.
For long-term view investors the 200-day, 100-day, and 50-day. Simple moving average popular choice.
Relative Strength Index (RSI)
RSI calculates the strength of the stock trend and helps to predict their reversals. Momentum oscillator standardized to a 0-100 scale designed to determine the rate of change over a specified time period.
RSI ABOVE 50 = BULLISH MOMENTUM
RSI of BELOW 50 = BEARISH MOMENTUM
As per Wilder when RSI value is above 70 it is considered as overbought and when RSI is below 30 it is considered as oversold.
MACD
MACD stands for Moving Average Convergence and Divergence. Plots the relationship between two separate moving averages. In stock market MACD is so popular because it is one of the most reliable and easy to use technical indicator. Even though it is lagging indicator, it provides a signal before moving average crossover. MACD gives a signal for trend continuation and reversal, therefore, used both by bulls and bears.
PARABOLIC SAR
SAR stands for ‘stop-and-reversal’. Parabolic SAR (PSAR) indicates entry and exit, or long and short, points in stock trends. PSAR is a momentum indicator. In the chart, the dots following the stock price is the Parabolic SAR.
BOLLINGER BANDS
Bollinger Bands, one of the most popular indicators, is an envelope around stock price indicating the price range of the stock based on stock volatility. When price moves towards upper band it is often considered as overbought and when it is near lower range it is considered as oversold.