Technical analysis helps in identification of short-term trades. It is based upon the reading of historical action of stock prices and finding out the profitable patterns to initiate a trade. The beauty of the subject is its applicability on any asset that has history of trading. Once you learn the subject, you can easily apply to any asset class available in this world.
Traders have to learn the types of charts, different time-frames, patterns that emerges on the charts, formation of support & resistance line, importance of volume and technical indicators. All these factors together help a trader to take a position either to buy a stock or sell it.
A stock is affected by fundamental news, emotions, demand- supply dynamics, political and global information. Technical analysis covers all the information that affects a stock price by merely reading a technical chart and one can easily identify how stock is reacting to this information.
Once a trader learns the concept of Technical Analysis. It will free him from emotional biasness and he can trade in a systematic manner. Since the study helps in understanding of movement of stock price. He can easily know whether to buy or sell stock. Also, it helps to build a system to place a stop-loss on key areas to safeguard a trader from incurring huge losses.
Advantages of Technical Analysis:
- Trader will easily identify whether to buy or sell a stock.
- He knows in advance the expected return from a particular trade.
- He knows about level of risk involved in a trade.
- Expected Holding period for each trade.
Assumption in Technical Analysis:
- Market discount everything: Technical chart reveals all known and unknown information by merely looking at the chart. Stock prices react very fast to any new information revealed by the technical charts. This will help trader to either buy or sell stock.
- Prices Moves in a trend: Technical chart helps in identification of major trend that stock exhibits. A stock can be in uptrend, down trend or side ways. All these can me seen by merely looking at chart.
- History tends to reveal itself: Stocks keep on repeating its history. You will see stock tend to move back to same level after some time from where it started journey. Also, it reacts similarly to the events that occurs overtime. This assumption makes technical analysis an important subject to study as you can easily identify how to take position in a particular event.
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