How to do technical analysis of stocks?

What is technical analysis of stocks?

Technical analysis of stocks is a method of analysis of stocks using a historical chart pattern of publicly-available stocks. This method of analysis is mainly associated with equity but can be used for some different types of securities too.

In other words, Technical Analysis means predicting the behaviours of the stock price by looking at the previous trends of price and volumes by using their charts and other technical indicators. Short term traders generally use Technical Analysis of stocks to make quick money by observing patterns in stock prices.

Historical technical analysis evolved from the theories of Charles Henry Dow. He is also known as the father of Technical Analysis. There are three theories by Dow, which serve as the basic assumptions behind technical analysis.

Technical analysis employs models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, business cycles, stock market cycles or, classically, through recognition of chart patterns.

What does Technical Analysis of Stocks not cover?

Technical analysts do not concern themselves with the overall health of the company. Unlike fundamental analysts, they are not interested in knowing the fundamentals of the company before investing in it.

How do you combine fundamental and technical analysis
Fundamental Analysis of Stocks Vs Technical Analysis of Stocks

Fundamental analysis of Stocks is more theoretical because it seeks to determine the underlying long-term value of a security. Technical analysis of Stocks can be considered to be more practical because it studies the markets and financial instruments as they exist.

Technical Analysis of Stocks

What are the best technical analysis indicators for intraday trading?

Intraday trading is all about making short term trades and taking some quick profits. Some of the best technical indicators for intraday trading are as follows:

  • Moving Averages: (MA) are some of the most commonly used technical indicators because historically, they have done very well. There are 5 mainly used types of moving averages include:
    • Simple moving averages
    • Exponential moving averages
    • Triangle moving averages
    • Double exponential moving averages
    • Smoothed moving averages
  • Support & Resistance: The aim of every trader in the stock market is to buy low and sell high. The biggest challenge comes when identifying the low point to buy and a high point to sell. In many cases, even experienced traders buy with the impression that the chart has reached the floor only to find the chart continuing a downward trend. It is for this reason that the concept of support and resistance becomes very important. The challenge many traders face is on how to identify the support or resistance. A number of ways have been developed which entail using various technical indicators such as moving averages to judge an asset.
  • Average Directional Index (ADX): The Average Directional Index (ADX) is a very important indicator used by traders to identify a trend. The directional movement is positive when the current high price subtracted by the previous high is bigger than the previous low subtracted by the current low. On the other hand, the directional movement is negative when the previous low subtracted by the current low is bigger than the current high minus the previous high. If the ADX value is strong, a trader needs to buy at the pullback sections when the pair retreats. The pullback section will act as the support.
  • Commodity Channel Index: (CCI) was created by Donald Lampert in 1980. It is one of the best and most common technical indicators used in day trading because of its accuracy. CCI measures the difference between the current price of an asset and its average change. A number that is high shows that price is above its average and a number that is low means that the price is below its average. Therefore, the CCI can be used to identify an overbought or an oversold level.
  • Relative Strength Index: (RSI) is an indicator just like CCI that aims to identify overbought and oversold positions. The RSI chart ranges from 0 to 100. When the RSI of a commodity, currency or equity goes above 70, it indicates an overbought position. This overbought position is a good candidate for bears.

What are the tools of technical analysis of stocks?

Charts are the valuable and easiest tools in the technical analysis of stocks. A large number of charts are used to analyze the trend of the market. The bar and line chart are the simplest and most commonly used tools of a technical analyst.

How do you master technical analysis of stocks?

The best way to learn technical analysis is to gain a solid understanding of the core principles and then apply that knowledge via back testing or paper trading. Thanks to the technology available today, many brokers and websites offer electronic platforms that offer simulated trading that resemble live markets.

Paper trading (sometimes also called “virtual stock trading”) is a simulated trading process in which would-be investors can ‘practice’ investing without committing real money. This is done by the manipulation of imaginary money and investment positions that behave in a manner similar to the real markets.

How Virtual Trading Stimulators Work?

Listed below are the steps to use the stock stimulators platform:

  • The first step is to open an account on the virtual trading app or website and then register yourself to the stock stimulators.
  • Once you are done with the registration, you will get the virtual money, some random amount (let’s suppose 10 lakh) in your virtual trading account.
  • You can utilize that amount to buy and sell the shares, the same way you do it in the real stock market.
  • Over the period, you will get to know that you are running on profits or losses.
  • Once you can gauge your performance, over a couple of days, you will get familiar with the procedure of how the stock market works.
  • When you think and become confident about your skills and potential, you may have developed gradually; then you can open a real trading account and start investing in the stock market with your real money

7 Best Virtual Trading Simulators for Indian Stock Market

  • TrakInvest
  • Moneybhai
  • Dalal Street
  • Moneypot
  • Chart Mantra
  • Wall Street Survivor
  • Market Watch

Technical Analysis of Stocks – Why do technical indicators fail?

There are many advantages of technical analysis like it can be applied to virtually any trading instrument and in any timeframe. Technical analysis can be used to analyze anything from stocks, commodities, interest rates or forex. One can also apply technical analysis from a short-term perspective to a longer-term time frame.

However, technical indicators also carry the risk of not performing 100% of the times. Technical indicators gather past price data to determine oversold/overbought readings.

The technical data on the chart and the price action in general are formed by the clash of buyers and sellers of the respective stock. If there are more buyers, the price is likely to increase. If there are more sellers, the price is likely to decrease.

No one however can determine the exact number of buyers and sellers on a given day. In this manner, technical indicators always imply what might be the possible outcome. They technically cannot be 100% accurate.

Is Technical Analysis of Stocks Difficult?

20+ years ago, technical analysis worked somewhat reliably.  Many retail traders would read up on their favourite chart pattern and a good portion of the time, things would play out as intended.

Stocks would easily hit their targets for formations such as head and shoulders pattern or ascending triangles.

We now have machines placing millions of buy and sell orders every minute.  This in essence makes reading the tape and price action more difficult than ever.

The key to success in the stock market equipped with the tool of technical analysis is to manage risk as per one’s financial capacity.


Top 7 Books to Learn Technical Analysis of Stocks

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