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By Foram Chheda
Mastering Trend Analysis and Volume Study for Successful Stock Selection
Jun 14, 2023
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Technical Analysis is the study of past price movement data and the prediction of future price movements. Fundamental Analysis and Technical Analysis are the two ways of evaluating or selecting a stock. Technical analysis, as opposed to fundamental analysis, focuses on analyzing charts and trends to identify good investments and trading opportunities. The study of price and volume is the core of the technical analysis. It is critical to learn the skills described in the above two methods before entering the stock market or any other field. Technical Analysis courses, for instance, can help you increase your understanding of this strategy.
Introduction to Technical Analysis
Technical analysis is a fascinating topic. It is a research technique that is used for identifying trading
opportunities in the market which depends on market participants’ actions. This is a probabilistic
discipline and not a conclusive science. To put it another way, it's more of an art than a science. There are
several well-known chart patterns and indicators on the market, but none of them perform 100% of the time. We
continue to follow them because they succeed more often than they fail. With experience, a chartist may establish
his or her viewpoint, giving him an advantage in market analysis over someone who only has a bookish understanding
of technical analysis. That is why it is referred to as art.
Market participants' behavior can be studied using technical charts, indicators, and patterns. These chart patterns emerge from the technical charts and convey a message. Traders must recognize these trends and make trading decisions based on them. Trading decisions should include when to enter, exit, and place stop-loss orders.
Why should we choose Technical Analysis?
Choosing any approach in the stock market is entirely up to the individual. Technical Analysis is typically used
for the short term, whereas Fundamental Analysis is used for the long term. This perception, however, may vary
from person to person.
Technical analysis tools are used to examine how variations in price, volume, and implied volatility are affected by supply and demand for securities.
It is frequently used to generate short-term trading signals from various charting tools, but it may also be used to improve the assessment of a security's strength or weakness to the larger market or one of its sectors. This data enables analysts in improving their overall valuation estimate.
Importance of Technical Analysis
Any security that has historical trading data can be used for technical analysis. Technical Analysis is an indicator that helps investors find the answer to the two most important questions:
- When to Enter or Exit a Trade?
- What is the Price Information?
Technical analysis is used to predict when to buy something, whereas fundamental analysis is used to determine
what to buy. In this context, timings are quite essential in terms of performance. Demand (support) and supply
(resistance) levels, as well as breakouts, can be identified using technical analysis. Returns can be improved by
looking for a breakout over resistance or buying near support levels.
These details are used to determine how beneficial or negative your trade will be. Many people believe that price information is the key to stock market investment success. Technical analysis is used to determine stock supply and demand. When the market is open, the majority of the technical data is dynamically updated. At the end of the day, some stock charts are refreshed. Thus it is important to keep a check on the stock market timings i.e., trade open and trade close.
Benefits of Technical Analysis?
Psychology- Technical analysis helps in the understanding of investors' and traders' market
sentiment and provides a clear picture of what they are doing. Technical analysis analyzes past patterns, which is
advantageous since human behavior is consistent; people react to market ups and downs in nearly identical ways
Trend Analysis- The most important benefit of technical analysis is that it helps traders and investors in predicting the market's future and making investment and trading decisions based on the analysis. The three most typical market trends are uptrends, downtrends, and sideways or ranging markets, all of which are easy to predict using technical analysis.
Entry and Exit Points- For entry into Stocks, commodities, derivatives, or currencies, only Technical Analysis can provide a precise entrance with a pre-defined exit point and Position Sizing. Candlestick Patterns, Chart Patterns, Elliott Wave Theory, Dow Theory, and other Indicators can help investors and traders make better market entries and exits.
Early Signals- Technical analysis' key benefit is that it provides early signals before a trend's reversal, allowing investors and traders to make decisions based on those signals. Market makers' activity can be evaluated using technical analysis, and such activities can be seen in Price-Volume Analysis.
Stop Loss and Target- The Stop Loss and Target for the position taken by investors and traders in the market are clearly defined by technical analysis. This allows traders and investors to make decisions based on their risk appetite.
How to do Technical Analysis?
The steps below will guide you in using technical analysis in your trading strategy:
Step 1: Identifying the Trend Trading techniques can either follow or go against the trend, therefore this is the first stage in technical analysis for traders. However, you must determine whether the current trend is an upward, downward, or sideways trend for each of these systems. Depending on your trading technique, each of these three price movements necessitates a distinct trading approach. Traders that employ this strategy often acquire or take long positions in assets that are rising in value. In a downtrend, assets are often sold short, whereas, in a trading range, instruments are commonly entered at established support or resistance levels where a trader believes a trend reversal is likely.
Step 2: Drawing Support and Resistance Levels
Support and resistance levels are points on a chart where an asset's price is likely to reverse or breakout. A support level is a point at which an asset's downward price trend comes to a halt when buying demand rises, causing the trend to reverse and turn higher. The same logic applies to resistance levels when the asset's upward price momentum begins to weaken and the price is more likely to reverse and head downward. Traders can find fantastic possibilities to open new trades at support and resistance levels.
Step 3: Establishing Entry and Exit Points
While identifying areas of support and resistance can provide ideal entry points, technical traders can also consider other criteria when deciding on their entry positions. Among these are technical indicators like the Average True Range (ATR) and the Relative Strength Index (RSI). These are volatility indicators that might assist a trader to determine whether a price move has enough velocity.
Step 4: Position Sizing and Risk Management
Professional traders employ technical momentum and volatility indicators like the Average True Range to help with position sizing and risk management. Once you've discovered an entry position, you may utilize the ATR to determine where to place your stop loss based on your risk/reward ratio.
Some long-term traders, for example, prefer to place their stop loss order 1 ATR away from their entry position, with a profit goal 3 ATRs away, for a risk/reward ratio of 1:3.