Technical analysis strategies are used to forecast upcoming prices of a stock. By analysing the chart patterns of past and current time. Unlike fundamental analysts – who decide on the basis of intrinsic value of a stock. The technical analysts uses charts of the stock to predict the movement of stock.
WHY TECHNICAL ANALYSIS WORKS:
Technical analysis reflects the idea of the movement of stock price in a specific trend which depends upon the attitudes of large investors such as FIIs, DIIs, bank or some other big player. As technical analyst Murphy explains in his book “Charting Made Easy”:
“Chart analysis or the technical analysis is the study of market action using price charts to forecast future price prediction. The cornerstone of the technical philosophy is belief that all factors that influence price – fundamental information, political information , natural disasters and psychological factors – are quickly discounted in market activity.”
An essential pillar for technical analysis is the support and resistance of a stock. Technical analysts use support and resistance to predict the movement of a stock. It is useful for short term investors.
There are hundreds of technical indicators available for the technical analysts. Technical analysts can also develop there own technical indicator with the help of a programmer. The technical indicators are categorised into four major types:
The technical indicator which predicts about the movement of a stock’s price on the basis of it’s previous trend falls under this category. For example : moving averages, MACD , parabolic SAR, etc.
Under this category are the indicators which predicts the stock price on the basis of it’s past and current movement. They are proved to be one of the most correct trade identifying indicators if they are used correctly. They tell us about a stock being in oversold or overbought zone. For example: stochastics, cci, relative strength index.
The technical indicators of this category tell us about the volatility of a stock. Volatility of a stock means the rapid tendency of a stock to change the direction of its move. For example: Bollinger bands, average true range, standard deviation.
The technical indicators of this type tells us about the volume of a stock. It tells us that whether the selling of the stock is taking place in large quantity or it is being bought in large quantities. For example: chaikin oscillator, obv, rate of change of volume (rocv).
Technical analysts use one of these indicators to identify their stock for the trading. There are countless technical analysis strategies and each requires a great deal of research and testing to ensure it will be viable. Keep in mind that no strategy whether fundamental or technical can guarantee cent percent results. Technical analysts can also use a tool called stock screener to scan for stocks based on user defined metrics , including technical indicator data and price patterns. For example:
- 50/200 moving average crossovers
- Strong volume gainers
- Head and shoulders
- Move above upper Bollinger band
- Ascending triangles
- Wedge patterns
For picking stocks by fundamental analysis visit: PICKING STOCKS BY FUNDAMENTAL ANALYSIS
The screener displays the results those stocks that meet the specific criteria and the investor can then enter positions or continue monitoring the stocks for further confirmation.