As we trade in the stock market, technical analysis is a common word we hear to identify the trading opportunity in shares or any other securities. Most traders use technical analysis for intraday or short-term trading opportunities.
Fans of technical analysis believe that the trend and patterns of the past will repeat in the future also. It is the technical analysts’ assumption that history tends to recap. It helps them to decide the Entry, Exit or holding of the share or index while trading.
Once you learn and become an expert in technical analysis, you can use these skills and knowledge in almost all the assets which have historical data.
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What do you mean by Technical Analysis?
It is an analysis used by security traders to assess the price movement and trend of the price of the security. To make this assessment, technical analysts use statistical and mathematical methods by combining the past price data.
Here the assumption is the past movements of the share or security indicate the future performance of the security.
The technical analysis is mainly used in intraday trading to find the trend of the share or security. Most intraday traders take trades based on the input provided by one or more technical indicators.
Traders use technical indicators for trading in futures and options also
Technical Indicators and Technical Analysis
Technical indicators are derived from the technical analysis. It is the result of the hard work of many researchers in this field.
These indicators mean the signals to buy, sell or hold a share or security. Different types of trends and patterns were developed to assist the traders in their daily market activities.
Different types of indicators are used in the share market, especially in intraday trading.
Some indicators are used for analysing the momentum of the shares, others focus on support and resistance. Some indicators focus on the trend of the price of the shares or securities.
In technical indicators, we believe that the trend of the price movement will repeat. Because, when the price moves in a particular direction, most of the participants in the market will move in the same direction.
It means when an uptrend or downtrend forms in the market, it will pull the price in the same direction. Price will directly reflect the good and bad things that happen in the company or underlying.
Type of Technical Indicators
Here we can see the main types of technical indicators.
- Relative Strength Index (RSI)
- Moving Averages
- Bollinger Bands
- Fibonacci Retracement
- The Dow Theory Principles
- Candlestick Patterns include single candlestick and multiple candle stick patterns
- Concept of Support and Resistance
- Volume Profile
- Moving Average Convergence Divergence (MACD)
- Pivot Points
- Central Pivot Range (CPR)
1. Relative Strength Index (RSI)
RSI is a technical indicator for momentum analysis. It was developed by J. Welles Wilder Jr. It gives us the overbought or oversold condition of the price of the share or security.
Traditionally, if the RSI indicator moves above 70, the share is considered in an overbought state and if the indicator goes below 30, indicating the oversold condition of the share.
Currently, traders use different values suitable to their trading style. RSI indicator is an ocillator.
2. Moving Average
Moving Average is also a technical indicator used by traders to identify the trend of the share or security. It is a very common indicator famous among traders. It also provides support and resistance to the share or index. It is considered as lagging indicator.
Moving Average is constantly averaging the price based on the historical price movements. Traders can easily adjust the time frame depending upon their nature of trade.
Normally there are two different types of Moving Average
- Simple Moving Average (SMA)
- Exponential Moving Average (EMA)
3. Bollinger Bands
Bollinger Bands have an upper and lower price range and it is used to find the oversold and overbought positions of the shares.
These bands plot at a standard deviation level above the simple moving average. The size of the band is developed by standard deviation.
Bollinger Bands uses Period and Standard Deviation, here the default value for Price is 20 and 2 for Standard Deviation. But we can alter the values as per the requirements.
4. Fibonacci Retracement
Fibonacci Retracement levels are the horizontal levels of support and resistance. It can be drawn between any two price points as support and resistance. These levels are not based on a formula. We have to select two price points in the chart, it will draw the lines as a percentage. These percentages are 23.6%, 38.2%,61.8%,and 78.6% and it uses 50% level also.
5. The Dow Theory Principles
Dow Theory is one of the oldest technical analyses used by traders. This theory was introduced by Charles H. Dow. Most of his collection of articles is known as ‘The Dow Theory.
6. Candlestick Patterns include single candlestick and multiple candle stick patterns
When we consider a share market movement in any time frame, we can identify an Opening, Closing, High and Low of price. All these four values can be represented by Candlestick. It is a popular method of displaying the price and patterns of security. Years before, Japanese rice merchants used this technique to gauge their market.
In technical analysis, people use two types of candlestick patterns. They are Single Candle Stick Patterns and Multiple Candle stick Patters.
Single Candlestick Patterns are
- Marubozu
- Doji
- Paper umbrella
- Spinning Tops
- Shooting star
Multiple candlestick patterns are
- Engulfing pattern
- Piercing Pattern
- Harami
- Morning Star
- Evening Star
- Dark cloud cover
7. Support and Resistance
The support is a level in the chart where the price will sustain and stop falling from it. In other words, support means the price point from where the buyers will start demanding the stock or index. So from the support, the price tends to go up.
Resistance is the level where the price will get resistant to going up. At this point, traders expect maximum supply for the stock. Usually, at this point, the traders start selling the stock.
8. Volume Profile
Volumes mean the number of shares bought and sold during a period. When the transaction is more, then the volume will be also high. Reading the volume profile itself is meaningless. We need to combine both price and volume simultaneously to read the trend of the market.
9. Moving Average Convergence Divergence
Moving Average Convergence divergence is also known as MACD. In technical analysis, traders use it as a Momentum indicator. It is also known as the Trend Following Momentum indicator.
The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period Exponential Moving Average. MACD is often displayed with a histogram (see the chart below) which graphs the distance between the MACD and its signal line.
10. Pivot Points
Pivot points are used as a technical indicator for intraday trading. It can be used to identify the trend of the intraday market in different time frames.
Pivot points are calculated by using the previous day’s prices of the stock like Opening Price, Closing Price, and High and Low Prices.
These levels remain the same during the trading day and will not change based on the time frame.
11. Central Pivot Range (CPR)
Central Pivot Range (CPR) is also usually used as a technical indicator to set up an intraday trade. CPR consists of three elements :
- Pivot Point
- Bottom Central Pivot (BC)
- Top Central Pivot (TC)
All these levels are derived from the previous days Open, Close, High and Low. CPR is used to find the key price levels in the charts.
It helps us to identify the Support and Resistance of the market. This indicator will direct us to predict the trend of stock and securities.
These are the main technical indicators used in share market trading. Traders use these indicators to predict the trend and pattern of the price of the shares, mainly in intraday trading.
One thing is noticed that traders following any kind of technical analysis and indicators find failure in their trading journey. We can not say that mare knowledge in technical analysis will not make you a master in the trading journey.
Many other factors will affect the success of a trader in the share market. Psychological and risk management is also an integral part of the success of the reader. In case you are an investor, definitely, the fundamental analysis also needs to be studied and mastered.