Basics of Technical Analysis - Stock Market Tutorial

Basics of Technical Analysis

• What is Technical Analysis?
• What are Charts ? Why do we need them ?
• How are Charts Plotted ?
• What are Technical Indicators ?

What is Technical Analysis ?

Technical Analysis (TA) is one of the methods used to predict the movement of the price of a stock or an index in the future. The prediction is derived based on a careful analysis of the previous price movements of the stock or index. To put is simply, the future trend is derived based on the past movements of the stock.

Technical Analysis does not yield absolute results always. As is the case with any forecasting system, the TA can give you a hint on what might be expected. But the expectations might prove to be false in extreme market conditions.

So TA will not help you totally overcome the risks involved in the markets, but if used properly, it can help you to predict and take precautionary measures to a large extent.

What are Charts ? Why do we need them ?

Charts are graphical representations of the movement of the stock price or the index value, over a period of time. Along with the price or value, the charts can also be used to depict other related indicators such as the Volume or total traded quantity of stocks. Based on the stock prices or values, statistical indicators are used to obtain values, which can also be plotted on the charts.

Charts offer a very convenient way to visually analyze the movement of the stock price or value. Rising and Falling trends can be easily found out looking at the charts. Repeating Visual Patterns in the charts are also used to forecast the movement. Charts can also be used to spot and trace the effect of key events in the history of the price of the stock.

How are Charts Plotted ?

Financial Charts are generally 2D Charts. There are of course 3D and other higher dimensional charts used in advanced analysis.

The X-axis (Horizontal axis) is generally used to depict the Time Frame. The Y-Axis (Vertical Axis) is used to depict the price or the value that varies with time.

What are Technical Indicators ?

Technical Analysts often rely on some Statistical and Mathematical functions that are applied on the price or value of the stock. These are generally called as ‘Technical Indicators’ . The resultant values, after applying these functions to the price of the stock, are again plotted on the Chart. Analysts can get further hints from analyzing the movement of these indicator values.

There is no consensus or a prescribed set of indicators that have to be used. Each Technical Analyst uses a custom set of these indicators depending upon his / her Trading strategy.

Some of the most commonly used indicators include Relative Strength Index (RSI), Moving Averages (MA), Moving Average Convergence Divergence (MACD) and others.

Source: http://marketlive.in/stock-market-tutorials/stocks-tutorial-technical-analysis-basics.php