10 Basics of technical Analysis
In this blog we will focus on the basics of technical analysis.
What is supply and demand ? how does the supply and demand plays important role in the movement of stocks ?
The fundamental basis for technical analysis is that prices shift with supply and demand . If the demand exceeds the supply , the price will rise . If the supply exceeds the demand the price will fall.
Charts reflects this rise and fall . By studying this movement on a chart and using the technical studies , you can make predictions on which way the price is likely to go .
Why the trader always prefer to use charts ?
Charts provide a graphical history of market performance . Investment without the graphical history is going on a trip without a roadmap .
Charts can help you determine whether a stock is historically high or low . they help you determine whether stock is in an up trend or downtrend .
Another great strength of chart analysis is timing . Better you are at it better the performance .
What is price trend ? How to identify Price trend ? How many types of prices trends are there ?
Upward trend , Downward Trend and Sideways Trend .
The purpose of charting prices is to identify price trends as they begin to develop and to make trading decisions based on that trend . Another way of identifying price trends is by human psychology into account certain pattern have been identified over the years and it is assumed that these patterns will continue into the future .
On a chart prices are reflected in a series of peaks and valleys . The direction of these peaks and valley’s make up the price trend . An Upward trend would have a series of successively higher peaks and valleys . A downward trend would have a series of successively lower peaks and valleys . A sideways trend would have a series of successively level peaks and valleys .
When the price is in uptrend , demand exceeds supply and we are in a bull trend , pushing prices higher . when the price is in a downtrend , supply exceeds demand and we are in a bear trend , pushing prices lower . when the price moves sideways , supply and demand are in balance .
How trends are broken ? or How does market set a new level ? How to identify the new trends ?
In addition to the trend direction , trend is also broken into three categories .
Major , intermediate and near term trends .
Time lines for each of these depends on the type of trading . for example – futures traders have a shorter trading time span than stock market traders because future contracts expire and stock do not .
Major trends will last for a specific period of time .
Intermediate trends would have a time frame within the major trend and would be reflected as a correction in the major trend . Near – term trends are shorter periods within the intermediate trend that would indicate buy and sell positions . For example , if the intermediate trend is up , a short term downward trend may be an opportunity to buy . If the intermediate trend is down , a short – term upward trend may be an opportunity to sell.
Typically , to determine a tentative trend , there must be at least two lows with the second low higher than the first indicate and up – trends , or two lows with the second low lower than the first to indicate a down – trend.
What are Support and Resistance level ? How these level are identified ?
How these levels are created on charts ?
Using Support and resistance level how can we identify the new trend in the securities ?
Support is the price level at which demand is strong enough to prevent the price from declining further . At this level demand overcome supply and prevent the price from falling below support .
When support level is broken , it means that bears have won over bull .
Support taken at a particular level repeatedly forms a support zone which is not easily broken , but volatile price movements can lead to support levels to be broken easily.
Resistance is equivalent to “ supply “ line . When Selling Occurs repeatedly near specified level , resistance forms at that price level.
When a resistance level is successfully penetrated that level becomes a support level .Similarly when a support level is successfully penetrated , that becomes resistance level .
The advantage of support and resistance level can be taken when stocks form some pattern .
By identifying the support and resistance level one can buy at the support and sells at the resistance ,in the short term ..
Support and resistance level can be used to forecast trends . Trader’s expectations are directly reflected in support and resistance levels. When investor’s expectations change , a breakthrough in support or resistance occurs.
If traders expect prices to go up , a breakthrough in the resistance will occur and the support level will also be raised . this is reflected on a chart with each successive low point higher than the previous . If investor’s expect prices to go down a breakthrough in the support level will occur and the resistance line will also be lower .
If expectations continue to go up , and a breakthrough in resistance shows a new uptrend , a new resistance level will be established and the old resistance level will becomes the new support level.
If expectations continue to go down and a breakthrough in the support level shows a downward trend , a new support level will be established and the old support level will often become the new resistance level.
How does the volume plays a significant role in stock finding ?
- When price rises and volume increase is a positive sign .
- When price falls and volume increase is a negative sign .
- When price rises and volume falls , it indicates that the rally is not very healthy , and some speculation might be going on .
- If price fall with volume decreasing , it can be considered a positive sign , and a sign of imminent trend reversal is achieved .
What is Trend reversal ?
As prices continue in this upward trend , and a corrective dip in the trend comes all the way down to the previous low , it may be an early warning that the trend is ending or at least moving to a sideways trend . if the support level is penetrated , a trend reversal is probable . failure to exceed previous peaks in an upward trend Is also an early warning that the existing trend is changing .
