Background

Overview:-

As we know that developing a well-researched perspective is difficult for getting success in stock market. A good point of view should have a directional view and should also include information such as:

1  Price at which one should Enter and Exit

2.  Risk and Reward Ratio

3.  Holding Period for stocks

Technical Analysis helps to develop a point of view on a particular stock or index and helps to execute the trade, define the entry, exit, and risk reward ratio.

Technical Analysis also comes with its own characteristic, some of which is highly complex. However, technology makes it easy to understand.

What is Technical Analysis?

It is a research technique to identify trading opportunities in the stock market based on market participants’ actions. The actions of market participants can be view, utilizing a stock chart. Over time, patterns are formed within these charts, and each pattern communicates a certain message. The job of a technical analyst is to identify these patterns and develop a point of view to execute a trade.

Like other research technique, technical analysis is also based on some assumptions. As a technical analysis practitioner, you need to trade the markets, keeping these assumptions in perspective. We will understand these assumptions in detail.

Also, at this point, it makes sense to throw some light on a matter concerning Fundamental Analysis and technical analysis. Often people get into an argument contending a particular research technique is a better approach to the market. However, in reality, there is no such thing. Every research method has its own advantage and disadvantage. It would be Irrelevant to compare Fundamental Analysis and technical analysis to figure out which is a better approach.

Both techniques are different and not comparable. In fact, a smart trader would spend time on learning both the techniques to identify great trading or investing opportunities.

Setting expectations

Often market traders approach technical analysis as an easy and quick way to make money in the markets. Yes, if done right, a windfall gain is possible but to get to that position, one must put in the required effort to learn the technique.

If you approach technical analysis as a quick and easy way to make money in markets, trading destruction is bound to happen. When a trading loss happens, more often than not, the blame is on technical analysis and not on the trader’s inability to efficiently apply Technical Analysis to markets. Hence before you start delving deeper into technical analysis, it is important to set expectations on what can and cannot be achieved with technical analysis.

1. Trades – Technical analysis is best used to identify short term trades. You should not use technical analysis to identify long term investment opportunities. Long term investment opportunities can be best identified using fundamental analysis. If you are a fundamental analyst, use technical analysis to verify the entry and exit points.

2. Return per trade – Technical analysis trades is short term in nature. Do not expect big returns in a short term. The trick with Technical analysis being successful is to identify short-term trading opportunities that can give you small but consistent profits.

3. Holding Period – Trades based on technical analysis can last between few minutes and few weeks, and not beyond that.

4. Risk ­–In case of an adverse movement in the stock, the trade starts making a loss. Generally, in that situations, traders hold on to their loss-making trade with a hope they can recover the loss. Remember, Technical analysis based trades are short term, in case the trade goes adverse, do remember to book the losses and move on to identify another opportunity.