A successful technical trader is one who applies his profoundly acquired knowledge in stock trading for accumulating wealth. With the understanding of technical analysis, a trader can make smarter choices while trading in stocks that lead to profit maximisation. The fundamentals of stock market technical analysis are lucid and, once learned, can help in gaining unimaginable profits. Therefore, this article will give you an overview of technical analysis of stocks and how to become a bright technical trader.
What is technical analysis?
This is the study of statistical figures and historical market data, including volume and price. By using quantitative analysis, behavioural economics, and market psychology insights, technical traders and analysts aim to use historical performances to predict future market behaviour. The two most common forms of technical analysis are technical indicators and chart patterns.
How is technical analysis useful?
This term refers to a variety of strategies that involve interpreting price action in a stock. Mostly, this analysis is focused on the determination of current trend and whether or not this trend will continue, and if not, then when it will reverse. Some traders use candlestick formations, some trendlines, and some prefer boxes and bands generated through a mathematical visualization. Most technical analysts utilize an amalgamation of tools for recognizing potential entry and exit points. In addition to looking at chart formations as possible entry points for short-sellers, a trader also examines moving averages for various time periods to confirm the likelihood of a breakdown.
How to utilize technical analysis?
The chief principle underlying the analysis is that the stock market price demonstrates all available information that is possible to impact the market. Hence, there is no need for looking at fundamental, economic, and new developments because they are already priced into a given security. In terms of the market’s overall psychology, analysts generally think that prices move in trends and the past tends to repeat itself.
As they believe that past price trends tend to repeat itself, analysts sit with historical stock charts, look at volume and price information and then by using trends, analysts figure out how security’s price may progress in the future. Accordingly, traders will select stocks that will appreciate and sell stocks that will depreciate.
Chart patterns are a subjective method in which technicians try to identify support and resistance zones on a chart by observing specific patterns. These chart patterns, nurtured by psychological factors, are delineated to predict where stock prices are headed, following a breakdown or breakout from a particular price time and point. For instance, an ascending triangle pattern is a bullish chart pattern that portrays a chief area of resistance. So, a breakout from this particular resistance will lead to a notable, high-volume move higher.
Technical indicators are the statistical form. Here, traders employ varied mathematical formulae to volumes and prices. The most common indicators are Moving Averages, that smooth out price data to assist in making it easier to spot trends. More complex indicators include MACD i.e. Moving Average Convergence Divergence, that looks at the interaction between several moving averages. Technical indicators are often incorporated into trading systems because they can be calculated quantitatively.
How to become an affluent technical trader?
A technical trader employs various tools and indicators who places trades built on technical analysis of charts. The technical traders study price charts to forecast the direction of a market movement. To become an affluent technical trader, the trader must learn technical analysis, fundamentals and applications minutely. Only then he will be able to employ the best tools at the right time. Given below are some essential tricks that technical traders must follow for profit maximisation:
- Trust the chart: The quintessence of technical analysis is analysing a price action on a chart for arriving at a buy or sell decision. Based on indicators on the chart rather than on the fundamental characteristics of the security, you can determine if the security has a positive expectation of making money.
- Curve Fit: Curve-fitting is the process of testing your indicators’ parameters against historical data to see which would have been most effective. An excellent technical trader backtests indicators by employing realistic assumptions. An indicator which has worked in the part does not ensure that it will work in the future.
- Befriending the trend: The best way to earn money is following your security’s trends. You can make money in the long-run when an uptrend is formed by buying and selling when uptrend peaks. You have to form your own trends. Trends can be small as well as large. It can hundred bars on a weekly chart as well as six bars on a ten-minute chart.
- Diversify: When you diversify, you reduce your risks. In technical trading, you can diversify in two places. First, by the choice of indicators. A noncorrelated indicator that confirms a buy/sell signal increases its chances of being correct. Second, choice of securities. A trade that involves two securities whose prices progress independently reduces risk. Moreover, you can estimate the extent of correlation scientifically by using a spreadsheet.
Ensure becoming an eminent trader
You enter the stock market and start investing with the aim of making money. But, you must ensure that you are making wise decisions, have appropriate knowledge, and know how to apply various tools and methods practically. Hence, a technical analysis course gives you a comprehensive understanding of the foundations of technical analysis and help you become a prominent trader in the Indian stock market.
We have curated two brilliant courses for you presented by Elearnmarkets. Elearnmarkets is a financial e-learning platform that provides various stock market and finance related courses, helping the population broaden their financial knowledge.
Complete Foundation on Technical Analysis Course:
This course is mentored by Piyush Rawtani, a leading and certified trader. In this course, you will gain an insight of the price action and help to build a firm foundation and understanding of technical analysis. This course is effective in teaching the various technical strategies, techniques, market dynamics, trends, breakouts, trendlines, support and resistance, moving averages and trading psychology to the participants.
Technical Trader Program (In Hindi):
This course is directed towards Indian stock market traders and enthusiast and is available in Hindi. Learning only the fundamentals will not be of any usage until the theory is applied practically. This course is curated to provide practical knowledge and picture to the participants of technical analysis and how to select the best stocks for investment. You will learn Fibonacci extension, Fibonacci retracement, price action, channels, and trendlines.
On completion of this course, our team is sure that you will get an all-inclusive and broader understanding of the concepts and apply in practical for a successful trading journey.
Technical analysis along with fundamental analysis are used for trading in the stock market. The former deals with historical data whereas the latter one deals with quantitative values. For earning profits, knowledge of technical analysis is indispensable.