Chapter 1: What is Technical Analysis?

What Is Technical Analysis? 

Technical Analysis is the most important tool used, especially by traders (intraday and long term) to make an informed judgment about the trades which they could take and make gains on them. Before moving on, a very simple disclaimer, no tool or technique guarantees perfect results. But with the help of tools available for technical analysis, one can make more informed decisions about the trades which they are entering into.

The most important ingredients of Technical Analysis:

This is the most important point of consideration before understanding the various tools used for technical analysis. So all the tools for technical analysis are standing on two pillars of Price and Volume.

A good understanding of price action and volume which is recorded with the movement of the price goes a long way in the understanding of Technical Analysis and its indicators.

What is Price Action?

A simple, yet the most important phenomenon for traders in their day to function is the price action. It simply provides an understanding of the mood of the buyers and sellers in the market. Whether the buyers or sellers are parking their orders in the market and waiting to be filled, or if they are aggressively hitting their orders in the market and taking positions at whatever price that is available.

The aggressiveness of the trades executed goes a long way in understanding the market sentiment. The size of the order also makes a lot of difference to the traders’ sentiment. Large size orders generally mean a large institution or major player is showing interest in that particular stock or share. And more likely than not, the market reacts to the sentiments of the big players. Although one could argue and say that the price action is a historical analysis of an event that has already transpired, but the past data of price action has a lot of bearing on the future course of action.

What is Volume?

Just like price action, the volume is an important barometer to analyse the past data and make an informed judgment about the future. The total quantity traded within the specified period tells us a lot of information about the sentiments of buyers and sellers. Higher the volume within the specified time-frame backed by strong price action around it goes a long way in the formation of technical tools and parameters. 

So what exactly is Technical Analysis?

In simple terms, Technical analysis is a tool to understand and forecast the price trends of any stock (or share) by using price and volume as the basis. Technical analysis can be used while trading stocks, futures, commodities, fixed-income, currencies, and other securities.

The most commonly used Technical Analysis tools:

In these times when there are thousands of Technical analysis tools, it is imperative that we choose the ones which have a proven track record and also the ones that suit one’s trading style.

Through this journey of understanding Technical Analysis, we will be learning and understanding the most commonly used Technical analysis tools by traders and investors. Following is the list of topics that will be covered in this series of TA:

  • Supports and Resistances
  • Moving Averages
  • RSI - Relative Strength Index
  • MACD - Moving Average Convergence and Divergence
  • Bollinger Bands