Technical Analysis

Technical analysis involves the study of past market data related to price and volume with the purpose of forecasting future price movements. Technical analysis does not help in making absolute predictions. Rather it helps in projecting the “likely" price movement over time.

Technical analysis is applicable to commodities, stocks, futures, foreign exchange (forex), indices or any tradable instrument, the price of which is influenced by supply and demand trends. It is used by day traders and short-term investors participating in investment markets, such as the stock market and the foreign exchange (forex) market. This type of analysis is also very useful for hedgers.
How is Technical Analysis Done?

Technical analysis is based on the premise that price discounts every aspect and information in the market. Technical analysis is also based on the belief that price movements are never completely arbitrary and follow a trend. A technical analyst believes that it is possible to identify an ongoing trend, trade based on the trend and generate profits as the trend unfolds.

The methods used for technical analysis are:

1. Moving averages: This method is used to identify various support and resistance levels for the short and long term. The most commonly used moving averages are the 30-day moving average (DMAs) and 200-day moving average (DMAs).

2. Charts and patterns: Extensive charts are made based on historical data on price movements. These charts are used to identify patterns and shapes, such as double top, double bottom, head and shoulders and triple bottom.

Benefits of Technical Analysis

The benefits of technical analysis are:

1. Helps to identify a trend, allowing investors to make predictions on future trends.

2. Allows investors to judge the direction of the current trend and enables them to gauge the best time to take a position in the market.

3. When it is used in conjunction with fundamental analysis and company and industry related news, it minimizes the chances of an investor incurring losses.

Drawbacks of Technical Analysis

The drawbacks of technical analysis are:

1. It draws heavily on a person’s opinion or interpretation.

2. It is more a study of probabilities than of actual value.

3. Useful only for short-term investments.