Let us understand Technical Analysis with easy words

Introduction to Technical Analysis

We all trade in the markets for different assets(Like:Gold ,shares,oil,cotton and so on) with the only perspective that is to Buy an asset at lower prices and sell the same at higher prices, so that we end up earning profits. For this perspective we purely have two tools or rather two approaches to track the movement of any asset prices –The fundamental tool and Technical tool, popularly known as Fundamental Analysis and Technical Analysis.

Technical Analysis

Technical approach is to forecast the future price movement and direction based on the historical price and volume data of the share. As we know prices are always determined with the forces demand and supply in any market for any asset, so this approach is ultimately based on the analysis of demand and supply equation. If the demand forces are greater than the supply forces then the prices tend to rise encouraging the analyst to buy. On the same account if the supply forces are greater than the demand forces then the prices tend to fall asking the analyst to exit from the scrip or simply book profits.

Technical Analysis involves the study of charts which shows the picture of Price and volume data of the underlying and the underlying can be stocks, indices, commodities, currency, futures or any trad-able instrument where the price is influenced by the forces of supply and demand.

Technical analysis is the science of recording the actual history of price and volume data in a graphical form and from that pictured history, the Technical Analyst predicts the probable future trends and directions.

Uses of Technical Analysis to the Traders or Investors

  

•       It is a process of identifying trend reversals at an early stage.

•       It helps to ride the trend which has been identified till it reverses again.

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Note : the exact bottom and top can never be catched. They can only be catched by fluke .It is just not possible to buy/sell consistently at the tops/ bottoms

Early entry in the stock (Buying near bottom).

•       Early exit from the stock (Selling near top).

The above chart of SBI shows trend reversal at an early stage as well the entry level at lower prices and exit at higher prices by booking handsome profits.