The First Step
Technical Analysis Step 1: Learn to read the charts
The first step to technical analysis is to learn how to read charts. There are many types of charts but they are generally similar. The most basic and commonly used one is the candlestick chart.
As shown below, each candlestick represents a specific time frame. If you have chosen a 30-minute time frame, then each candlestick will depict the trading activities within a 30-minute period. If you have chosen a day as the base time frame, then each candlestick will represent the transactions within the day.
As a technical analyst you need to study the following data:
· Price – Present & Historical
· Volume – Present & Historical
· Market Breadth – Present & Historical
If you don’t know where to start from then take help of an advisor or friend who practices this art. A lot of material is available online and a lot of good books are available too. It’s worth investing few bucks and hours in learning this art.
A black candle refers to a drop in price, meaning that the closing price is lower than the opening price. A white or unfilled candle refers to a rise in price, meaning that the closing price is higher than the opening price.
The horizontal lines at the top and bottom of the candlestick represent the opening or closing price, while the vertical lines that extend from above and below the real body are the highest and lowest traded prices within the set time frame respectively.
The candlestick patterns can be used to indicate when a market trend starts to reverse. If we can predict in advance when an upward trend will reverse, we can profit by going short in the market as early as possible. Similarly, if we can forecast that a downward trend is about to stabilize and rebound, we can grab this great opportunity to go long in the market. Candlestick patterns can also be used to determine whether the current trends will continue. Once you are able to master these patterns, you will be able to trade according to the trends. This will give you a lot of confidence to hold your positions or even add positions to earn bigger profits.
Technical Analysis Step 2: Learn to spot trends
Spotting the trend
The second step in technical analysis is to learn how to draw trend lines, as well as resistance and support positions. Using technical analysis it’s easy to find what’s the general trend of the market? It’s always beneficial to know if the market is in uptrend or downtrend.
Support position is the price position which is supported by buyers. When price falls and approaches the support position, it will tend to rebound. Resistance position is the price position where there will be tremendous selling pressure. When price rises and approaches the resistance position, it will tend to retrace. The support and resistance positions are usually determined using trend lines. Alternatively, you can also use other technical indicators such as Fibonacci lines, moving averages and Bollinger bands.
Drawing Trend Lines
In an upward trend, choose two ascending low points and join them to make an upward trend line. In a downward trend, choose two descending high points and join them to create a downward trend line. In order to improve the accuracy of the trend lines in predicting future market movements, we will filter away those trend lines that are not good enough, leaving behind those that will be useful for our analysis.
A trend line must undergo a series of tests before it can be considered useful and effective. Those that fail to meet these stringent criteria should be discarded.
First, the existence of a trend must be verified. An upward trend must have two consecutive ascending lows while a downward trend must have two consecutive descending highs. Only then a trend can be considered real and the straight line that joins the two points can be called a trend line.
Next, after the trend line is drawn, a third point must be identified to verify that the line is an effective one. In general, the more points a trend line touches, the more effective it is and the more accurate it will be in predicting future movement.
In addition, we must continue to adjust a trend line based on subsequent market situations. For example, when an exchange rate breaks below an upward trend line but then quickly rebounds to move above it, the analyst must redraw the trend line from the first low point to the new low point or try to produce a more effective line using the second low point and the new low point.
Finding support and resistance
Once you are sure of the trend of market, the next step is to find out the right entry and exit point with respect to specific stocks. Let’s say, you like a particular stock A and you want to buy it. Technical analysis suggests that you should not blindly invest in the stock. You should first try to find out what’s the best price at which you can get it. If you are ready to make your hands dirty, you can very easily find out the support price of the stock. In a volatile market, it’s very common for stocks to test their support prices. Just wait for few sessions and you will get a chance to enter the stock round its support price. Similarly, you can find the best price at which you should get out of a position which is the resistance of a stock. You can buy at support and sell at resistance to keep things simple. Ride this sine wave of support and resistance to reap great rewards.
Buy and hold policy will play for you if you are in up trending market. Keep on sniffing for the start of the downtrend as that’s the right time you book profit and be cash rich. Once the downtrend is over, you can again enter the market and ride it till the top. As the market is very volatile these days, you will get many chances of entry and exit. So, be patient and enjoy the capital appreciation.
Conclusion
Using technical analysis one can find answers to the following questions
1. When to enter the market.
2. Which stock to buy and at what price.
3. When to book profit .
4. Which stock to get out from so as to minimize loss.
Answers to above questions are a sure shot way of being successful in stock market. So, it’s better to roll our sleeves up and be ready to learn the art of Technical Analysis and mind you, it’s not as tough and confusing as it sounds.
Technical Analysis Step 1: Learn to read the charts
The first step to technical analysis is to learn how to read charts. There are many types of charts but they are generally similar. The most basic and commonly used one is the candlestick chart.
As shown below, each candlestick represents a specific time frame. If you have chosen a 30-minute time frame, then each candlestick will depict the trading activities within a 30-minute period. If you have chosen a day as the base time frame, then each candlestick will represent the transactions within the day.
As a technical analyst you need to study the following data:
· Price – Present & Historical
· Volume – Present & Historical
· Market Breadth – Present & Historical
If you don’t know where to start from then take help of an advisor or friend who practices this art. A lot of material is available online and a lot of good books are available too. It’s worth investing few bucks and hours in learning this art.
A black candle refers to a drop in price, meaning that the closing price is lower than the opening price. A white or unfilled candle refers to a rise in price, meaning that the closing price is higher than the opening price.
The horizontal lines at the top and bottom of the candlestick represent the opening or closing price, while the vertical lines that extend from above and below the real body are the highest and lowest traded prices within the set time frame respectively.
The candlestick patterns can be used to indicate when a market trend starts to reverse. If we can predict in advance when an upward trend will reverse, we can profit by going short in the market as early as possible. Similarly, if we can forecast that a downward trend is about to stabilize and rebound, we can grab this great opportunity to go long in the market. Candlestick patterns can also be used to determine whether the current trends will continue. Once you are able to master these patterns, you will be able to trade according to the trends. This will give you a lot of confidence to hold your positions or even add positions to earn bigger profits.
Technical Analysis Step 2: Learn to spot trends
Spotting the trend
The second step in technical analysis is to learn how to draw trend lines, as well as resistance and support positions. Using technical analysis it’s easy to find what’s the general trend of the market? It’s always beneficial to know if the market is in uptrend or downtrend.
Support position is the price position which is supported by buyers. When price falls and approaches the support position, it will tend to rebound. Resistance position is the price position where there will be tremendous selling pressure. When price rises and approaches the resistance position, it will tend to retrace. The support and resistance positions are usually determined using trend lines. Alternatively, you can also use other technical indicators such as Fibonacci lines, moving averages and Bollinger bands.
Drawing Trend Lines
In an upward trend, choose two ascending low points and join them to make an upward trend line. In a downward trend, choose two descending high points and join them to create a downward trend line. In order to improve the accuracy of the trend lines in predicting future market movements, we will filter away those trend lines that are not good enough, leaving behind those that will be useful for our analysis.
A trend line must undergo a series of tests before it can be considered useful and effective. Those that fail to meet these stringent criteria should be discarded.
First, the existence of a trend must be verified. An upward trend must have two consecutive ascending lows while a downward trend must have two consecutive descending highs. Only then a trend can be considered real and the straight line that joins the two points can be called a trend line.
Next, after the trend line is drawn, a third point must be identified to verify that the line is an effective one. In general, the more points a trend line touches, the more effective it is and the more accurate it will be in predicting future movement.
In addition, we must continue to adjust a trend line based on subsequent market situations. For example, when an exchange rate breaks below an upward trend line but then quickly rebounds to move above it, the analyst must redraw the trend line from the first low point to the new low point or try to produce a more effective line using the second low point and the new low point.
Finding support and resistance
Once you are sure of the trend of market, the next step is to find out the right entry and exit point with respect to specific stocks. Let’s say, you like a particular stock A and you want to buy it. Technical analysis suggests that you should not blindly invest in the stock. You should first try to find out what’s the best price at which you can get it. If you are ready to make your hands dirty, you can very easily find out the support price of the stock. In a volatile market, it’s very common for stocks to test their support prices. Just wait for few sessions and you will get a chance to enter the stock round its support price. Similarly, you can find the best price at which you should get out of a position which is the resistance of a stock. You can buy at support and sell at resistance to keep things simple. Ride this sine wave of support and resistance to reap great rewards.
Buy and hold policy will play for you if you are in up trending market. Keep on sniffing for the start of the downtrend as that’s the right time you book profit and be cash rich. Once the downtrend is over, you can again enter the market and ride it till the top. As the market is very volatile these days, you will get many chances of entry and exit. So, be patient and enjoy the capital appreciation.
Conclusion
Using technical analysis one can find answers to the following questions
1. When to enter the market.
2. Which stock to buy and at what price.
3. When to book profit .
4. Which stock to get out from so as to minimize loss.
Answers to above questions are a sure shot way of being successful in stock market. So, it’s better to roll our sleeves up and be ready to learn the art of Technical Analysis and mind you, it’s not as tough and confusing as it sounds.
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