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Technical Analysis made easy

In this episode, we discuss the basics of Technical Analysis and explain concepts such as price/volume, support/resistance and more.

4504 views  22 Nov 2017

Fundamentals of Technical Analysis

Technical Analysis is not only statistic analysis but also an art of using historic prices to get direction of future price trend. Over and above absolute prediction it assists traders to find an indication on price of a stock or an index in short term.

Below are the vital parameters which are utilized for analyzing charts:-

Price – It is the rate at which an asset/share/commodity can be bought or sold. It is the highest amount a buyer is ready to pay for a share

Volume – It is one of the most fundamental and valuable parameters to comprehend while reading a chart of a particular stock or an index. In simple words, volume is the entire number of shares traded in a stock throughout a trading period. A strong change in traded volumes can indicate a rise or a fall in prices.

Trend – After volume, trend is the second most vital tool for a trader. A blend of trend and volumes aids the trader to decide whether to enter or exit the trade.

Trend is classified as follows:

  • Uptrend: Price progresses higher. In this case every high is higher than its previous high and every low is higher than its previous low.
  • Downtrend: Prices shifts lower. Stock enters in to a lower top lower bottom structure.
  • Sideways trend or Consolidation: Prices move in a specific trading range or are trending sideways.

Trendline – The easiest way of determining a trend is with a "trendline." All that is required is two peaks or trough points to draw an uptrend or a downtrend.

Support and Resistance

Support level is the price around which the share/security/commodity has earlier found increase in demand. Traders use such historically proven levels to enter or exit a particular security.

Resistance level is a price around which a stock has previously found incremental number of sellers. Traders use such levels to exit a long position or even short sell a security.

What is Stop Loss?

Trading involves a lot of risk taking and Stop Loss is the vital tool which is used to limit trading losses. It aids to eliminate emotions from decision making and it also aids to better control a particular trade. A Stop Loss order costs nothing to implement, but, regular brokerage is charged once the Stop Loss price has been triggered.

How does Stop Loss work?

A Stop Loss order is placed to Buy or Sell a particular stock once price hits a set trigger price. There is no manual involvement in executing the Stop Loss order. While having several open positions in the market, Stop Loss order supports the trader from getting trapped on the wrong side of a trade, which also serves as a shield from unwarranted losses.

Trailing Stop Loss, vital tool to protect gains

A trailing Stop Loss is utilized once prices start moving in favour of a trader. It is a tool normally applied to protect profits. On its implementation, trailing Stop Loss allows an open position to follow the ongoing momentum and continue to profit till prices sustains the current direction. A trailing Stop Loss stands triggered if price reverse.

How to set a Stop Loss:

  1. As per traders' discretion or loss he is willing to take.
  2. Support & Resistance method

As per traders' discretion

Before entering into a trade, a trader decides on how much risk he/she is willing to take in a trade. It is important for a trader to assess one's risk taking ability to effectively carry on trading activities.

Support & Resistance Method

Traditionally, it is observed that falling prices of a particular stock swiftly gets arrested at particular support levels. It is always logical to place Stop Loss just below these crucial support zones.