The technical analysis is a hotly debated topic on business news channels and websites. Technical Analysis is a term used for predicting the direction of prices of a stock through the study of past market data primarily price and volume.It attempts to understand the emotions in the market by studying the market itself, as opposed to its components.

One reason it has become popular is that anybody can look at the chart and see how prices have moved. Technical analysis is applicable to stocks, commodities, indices, futures or any tradable instrument where the price is influenced by the forces of supply and demand. Price refers to any combination of the open, close, high, or low for a given security over a specific time frame. The time frame can be based on intraday, daily, weekly or monthly price data. In addition, some technical analysts include volume or open interest figures with their study of price action.

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The basis of Technical Analysis

The study of technical analysis is based on three assumptions:

1. The Market Discounts Everything:

Technical analysts believe that the current price fully reflects all information. After all, the market price reflects the sum knowledge of all participants, including traders, investors, portfolio managers etc.

2. Price Moves in Trends:

In technical analysis, price movements are believed to follow trends. Most technical trading strategies are based on this assumption.

3. History Tends To Repeat Itself:

Another important thing in technical analysis is that history tends to repeat itself, mainly in terms of price movement. In simple words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysts are only concerned with two things:

1. What is the current price?
2. What is the history of the price movement?

Technical analysts use dozens of different quantitative approach in order to predict stock prices. Here, I'll introduce you to some of the key terms, which will give you a better idea about the concept:

  • Support Level: The level that the technical analyst believes a stock price will not fall below.
  • Resistance Level: The opposite of a support level, the level that the technical analyst believes a stock price will not exceed.
  • Breakout: If a stock surpasses the resistance level or falls below the support level, it is said to be a "breakout."
  • Volume: Volume is simply the number of shares or contracts that trade over a given period of time. The higher the volume, the more active the security.
  • Moving Averages: Perhaps the most commonly used variable in technical analysis, the moving average for a stock is the average price for the stock over a set period of time (the most common being 10, 20, 50, 100 and 200 days).
  • Relative Strength: The relative strength index (RSI) is a momentum indicator, which compares the magnitude of recent gains and losses over a specified time period to measure speed and change of price movements of any stock.

Chart showing Price History and Volume:

In the below mentioned chart price clearly shows, the stock is in up trend, and When the price comes near average line then buying occurs.

Chart showing Price History and Volume

Bottom line

Technical analysis is an extremely broad subject. When considering technical analysis, remember that things are quite often not always what they seem. Different people have different approach to analyse the markets. It can help investors anticipate what is “likely” to happen to prices over time. Successful investors use their own approach, which suit them best.

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