Chapter 10 - Technical Analysis : Introduction

Technical analysis

Have you heard of technical analysis? Yes or No? Well, don’t be taken aback by just hearing the word technical or analysis etc. It’s not as tough and complex or time-consuming as it sounds. What do we do in fundamental analysis? We generally identify scrips or shares which are a good option for investments, right? Suppose that after doing a fundamental analysis you have identified IVRCL and Global Pharma as two good stocks for investments. As a long-term investor you are convinced that your stock is a best bet for long-term investment. However, despite your value judgment, don’t you think that the timing (when to buy and when to sell this stock) is also very important as far as buying and selling is concerned? Yes. Technical analysis is the process of identifying, understanding and analyzing price trends over a period of time to predict the future as to when to enter in or exit from a stock. So in this chapter let’s learn how do people use technical analysis to predict entry or exit - whether its stocks, precious metals, currencies or commodities. Historical data is good enough to understand and to an extent predict the movement of stocks. This is done by studying the day-to-day, week-to-week and month-to-month price and volume changes of securities in the market itself. This approach is called technical analysis. Essentially, a technical analyst prepares charts and graphs of various market statistics to forecast stock prices and the market. Hence they are also called chartists.

Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components.