What Is Technical Analysis?
Kunal Saraogi, CFT
If you thought technical analysis was like peering into a crystal ball and making accurate prophecies about the future of your investments, you are terribly wrong. Technical analysis is much more about the present than it is about the future.It involves trying to understand the present to make sense of how the future would look.
Technical analysis focuses on "SENTIMENT" in the markets more than anything else. Sentiment refers to what the people who make up the markets- investors, punters, traders, banks, corporates, institutional traders, funds, jobbers and small investors are feeling. How they percieve things. Sentiments change rapidly and that is the reason stock prices change as rapidly as the do (sometimes a little too rapidly!).
The entire idea of this evolving subject focuses on gauging this sentiment and especially meaningful shifts in the prevailing sentiment. How is all of this accomplished? By the use of charts.
Chart for the S&P CNX Nifty
Technical Analysis or Charting as it is so often called uses price charts as the primary tool to understand how price have been behaving and what they indicate about the prevailing sentiment. Once you know what sentiment exists you can safely bet that unless something dramatically changes it the current sentiment has better chance of continuing than of its ending abruptly. Contrary to popular belief markets operate in identifiable trends and seldom are completely random.
The idea of charting price movements and looking for recurring patterns and
formations is not new and has been around a long time. Traders all over the world have been using some form of technical analysis for as long as there have been markets.The advent of computers and the ease with which impossibly large amounts of data can be processed with their use have given technical analysis a whole new meaning.
So how do technical analysts actually function? technical analysts use charts to assess the current trends in the market on a both short term and a long term basis. They then lookout for tell tale signs of an impending change in a trend or reversals using various techniques at their disposal.
This leads to a question that a lot of people have if technical analysis works so well why do people who use it ever get any losses why don't they just keep making money? Technical analysis doesn't can't change the markets, not even predict which way it would go with absolute accuracy. All it can do is point to the direction it is most likely to head in. If it doesn't go that way a technical trader quickly bows out taking a small hit. Opportunistic as it may sound this is the only way you can make money in the markets in a consistent way.
A good thing about technical analysis is that it is fairly easy to understand and use. Plus you don't have to be an expert to use it effectively, even a rudimentary knowledge can keep you out of some very sticky sitiuations and help you get the most out of your winning trades.
Technical analysis however calls for a great amount of practice and is something that you get better at as you do more of it. Although grounded firmly in logic, it still is at some level a craft and hence the need for practice.
So what are you waiting for?? Explore the idea further, try and make it a part of your trading and investing. Trust me you won't regret it. Wondering where you could learn it? Well right here!!
Equityrush offers extremely carefully designed and structured short term courses in technical analysis that will give a whole new dimension to your trading. To learn more about our courses click here.
