Know The Market(Session-11)

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Technical Analysis-

  • Technical analysis is done on the basis of historical price movement plotted on a two-dimensional chart.
  • This method believes that historical price trends are an indication of the future performance.
  • Used by short-term investors and traders, and rarely by long-term investors.
  • It is easy to understand as you can look at the chart and see how prices have moved.
  • An investor can understand and analyze the current, previous and possible future trend of the stocks.

Q- How does technical analysis work?

Ans- 

  • Technical analysis rely on market prices which is a reflection of the supply and demand for the stock.
  • Technical analysis read and make charts of prices.
  • Some common technical analysis tools are the day-moving averages(DMAs), Bollinger bands, Relative strength indices(RSI) and so on.

Stock Chart - Basics

  • It is the key to analysis is a stock chart.
  • Charts are not perfect but they provide clues as when people are buying or selling.
  • Charts make statistical assumptions about stock price.
  • By looking at charts you can keep your emotions out of the decision making process.
  • If the chart is weak though you like the company, you probably want to avoid it.
  • Choosing a time frame is very important in charting.

Types of Chart-

Line Chart-

  • Basically plots the closing prices of a stock over a specific period.
  • A line connects the price points.
  • Line charts are easy to read and understand, but they don't provide much information.
  • If combined with other technical indicators, it can work well.

Bar Chart-

  • Bar chart are popular with short term traders, as they are easy to use and understand.
  • The bar is a range of prices for a period.
  • By looking at a bar chart, one can make out whether the stock closed below or above the opening price.

Candlestick-

  • Candlestick charts are the oldest form of technical analysis.
  • It is popular with many traders, as they show so much information including the psychology of the market.
  • It is also visually appealing.

Trend Lines-

  • Trend is a direction in which the stock is moving or expected to move over an unspecified time frame.
  • Spotting a trend direction is important, as the stocks do not move in a single line.
  • They are three types of trends-

            a. Uptrend

            b. Downtrend

            c. Sideways

  • Idea is to ride a trend for as long as possible.
  • It is not easy to identify a trend changes the direction.

Uptrend-

  • Stock is climbing and is going up for a quite some time.
  • Following uptrend is the easiest and the most profitable strategy.
  • During bull market, many stocks are in uptrend which can last for months or years.
  • Sometimes the uptrend ends abruptly and stock not remain bullish for ever.

Downtrend-

  • Stock in a downtrend means, its moving lower and lower.
  • Downtrends are frustrating for bullish investors and traders.
  • If you are holding a stock that is in down trend, you are probably losing money.

Sideways Pattern-

  • In a sideways pattern, stock price remains in a narrow range.
  • It becomes difficult to predict, in which direction a stock is going.
  • Many times volume in a sideways pattern is very low.
  • Sideways patterns are very challenging to interpret, they are more suited to traders than investors.

Q - What is Support and Resistance ?

Ans-

  • Support : When a stock sees a continuous a fall in its price, the price level at which the stock is held from falling even low is called the support level. This is the level at which the stock price tends to raise up rather than fall further.
  • Resistance : When a stock sees a continuous a raise in its price, the price level at which the stock is held from raising further is called the resistance level. The stock may see a fall.

Technical Indicators-

  • Technical indicators are used to predict the future price levels, or simply the general price direction.
  • Most charting software includes dozens of different indicators that can be displayed on the charts.
  • Technical indicator is a mathematical calculation based on historic price and volume information, that aims to show probable financial market direction.

Q- What are moving averages?

Ans-

  • One of the widely used tools is the 200- day moving average.
  • In a 200 day moving average model, a moving average line helps in basing a decision on the stock.
  • A stock price movement above the moving average line indicates a buy and the price movement below the line indicate a sell.

Q- What is moving average convergence divergence(MACD) ?

Ans-

  • This is a very important tool used by technical experts, you just have to select the MACD and plot it on a chart. The MACD comprises two lines, fast and slow.
  • The fast line is the difference between the 26-day exponential moving average and the 12 day-exponential moving average.

Q- What is Fibonacci Retracement?

Ans- Fibonacci retracement is based on the assumptions that the markets retrace by a few predictable percentages, the best known of which are 38.2%,50% and 61.8% so, when the market retraces 38.2% it will generate either a sell or a buy call depending on the trend.

  • You have to plot Fibonacci retracement from the peak price to the lowest price the stock has traded in the recent period.
  • When the price reaches the 38.2% level and bounces, it means the price of the stock at which the chart plots the 38.2% retracement is the resistance level and 23.6% will be its support.
  • However, if the price raises above the 38.2% level, you may look at the price at 50% retracement level as your next resistance.

Q- How to pick a stock using technical analysis ?

Ans- Once you zero in on the stock, look at its volumes and price trends. Generally, higher volumes with higher price rise indicate an uptrend, but it should not be considered a thumb rule.

Limitations of Technical Analysis-

  • Technical analysis is as much as an art as a science.
  • It takes lot of time and effort to understand, learn and to be complement to analysis the stocks through technical analysis.
  • It is extremely difficult to read the signals correctly.
  • In general technical analysis is more useful tool for short term trading.

---Thank You---

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