Technical Analysis: An overview

As we know by now, fundamental analysis evaluates securities by attempting to measure their intrinsic value. In contrast to fundamental research, technical analysis focuses on statistical patterns in the price and volume of stocks. As an investor, you must be aware of the following information: 1. Price at which one should buy and sell stocks 2. Risk involved 3. Expected reward 4. Expected holding period Technical Analysis (also abbreviated as TA) is a popular technique that allows you to do just that. Like all research methods, it has some unique characteristics. As we move through this subject, we will learn more about these qualities. 

Technical Analysis, what is it?

Imagine you are on vacation in the Maldives, where everything is foreign, including the language, culture, and cuisine. But you want to end the day with a delicious dinner. When you inquire about an excellent restaurant, you are informed of a nearby food street. You choose to give it a go. Surprisingly, there are numerous vendors selling various types of cuisine. Everything appears unique and intriguing. You have no idea whatsoever what to eat for dinner. In addition, you cannot inquire locally because you do not speak the language. Given this information, how will you choose what to eat? Basically, you have two alternatives. Option 1: You go to a seller and check out the way the food is cooked. You might even try a little bit to see if you like it. You do this with a few different vendors, and then you probably end up eating at the place that makes you the happiest. The good thing about this method is that you know exactly what you are eating because you have done your own research. However, the method you chose isn't really scalable, since there could be more than 100 vendors and you can probably only cover 4 or 5 of them. So, there is a good chance that you missed the best tasting food on the street. Option 2: You simply observe the food stalls while standing in a corner. You search for a seller who attracts the greatest number of customers. Once you encounter such a vendor, you make a simple assumption: "Since he has so many clients, he must be serving the tastiest food!" You opt to purchase dinner from this particular vendor based on your assumption and the crowd's choice. There is a possibility that you are consuming the most delicious street food available. This method's scalability is its greatest asset. You only need to identify the vendor with the most customers. However, contrary to popular belief, the majority is not always correct If you could recognize, option 1 is very similar to Fundamental Analysis where you research about a few companies thoroughly. Option 2 is extremely similar to Technical Analysis in that it looks for opportunities based on the existing trend, or market preference. Technical analysis is a study technique used to find trading opportunities in the market based on market players' activities. A stock chart can be used to visualize market players' activity. Patterns evolve inside these charts throughout time, and each pattern offers a different message. A technical analyst's task is to recognize these patterns and form an opinion. Technical analysis, like any other research technique, is based on a number of assumptions. as we progress, we will have a better understanding of these assumptions. People frequently argue that a certain research strategy is a superior way to promote. However, there is no such thing as the best research strategy. Every study method has advantages and disadvantages. It would be pointless to compare TA with FA to determine which is the best strategy. Both strategies are distinct and incomparable. In fact, a wise trader would spend time learning both approaches so that he can spot outstanding investing chances.

 Setting expectations

Technical analysis is frequently viewed by market participants as a quick and easy technique to make profit in the markets. Technical analysis, on the other hand, is everything but quick and easy. Yes, a massive gain is possible if done correctly, but in order to get there, one must put in the necessary effort to understand the technique. Trading disaster is unavoidable if you regard TA as a quick and easy strategy to make money. When a trading disaster occurs, technical analysis is frequently blamed, rather than the trader's inability to apply Technical Analysis to markets. As a result, before digging deeper into technical analysis, it is critical to establish expectations

1. Trades – TA is best used to identify short term trades. Do not use TA to identify long term investment opportunities. Long term investment opportunities are best identified using fundamental analysis. If you are a fundamental analyst, you may also utilize TA to evaluate your entry and exit points.

2. Return per trade – TA based trades are usually short term in nature. Do not expect huge returns within a short duration of time. The key to success with TA is to uncover regular short-term trading opportunities that can bring small but consistent profits.

3. Holding Period – Technical analysis trades can last anywhere from a few minutes to a few weeks, and usually not longer.

4. Risk – Traders frequently start a trade for a specific reason, but when the stock moves against them, the deal begins to lose money. In such cases, traders typically hold on to their losing deal in the aim of recovering their losses. Remember that TA-based trades are short-term; if the deal goes bad, remember to reduce your losses and move on to find another chance.