What is Technical Analysis?
Technical analysis is the process of forecasting future price movements based on the analysis of past price movements. Technical analysis will not be resulting in absolute predictions about the future. Instead, technical analysis can help traders or investors to anticipate what is likely to happen to future prices over the time.
Presumptions of Technical Analysis-
Technical analysis is only applicable to securities. The prices are affected by the forces of supply / demand. It does not work well if other forces will influence the price of the security. In order to achieve success, technical analysis makes 3 important assumptions about the stocks that are being analyzed:
Liquidity is an essential part. The heavily traded stocks will allow investors to trade quickly and easily. Thinly traded stocks tends to be difficult to trade because there are not many buyers or sellers at any given time. Due to this the buyers and sellers have to change their desired prices considerably in order to make a trade. On the other hand low liquidity stocks often gets low priced, which means that their prices could easily be manipulated by investors.
No Artificial Price Changes-
Dividends, splits and distributions are the most common culprits for artificial price change. There is no difference in the value of the investment as artificial price change will dramatically affect the price chart, due to this applying technical analysis becomes tough. This kind of price change influence from outside sources could easily be addressed by adjusting previous data or historical data prior to the price change.
No extreme news –
As technical analysis could not predict extreme events like company’s CEO dies unexpectedly, terrorist attacks, and other unexpected events. When these forces of extreme news influenced the prices then technical analysts have to wait patiently until these things settle down.
“What” is more important than “Why” in Technical Analysis
Technical analysts are only concerned with the following two things:
1. What are the current prices?
2. What is the history of the price movements?
The prices are the result of the battle between demand and supply of the company’s stock. The aim of the technical analysis is to predict the direction of future price. To focus on price and only price technical analysis represents a direct approach. Technical analysis believes to concentrate on “what” and they never mind “why”.
Efficacy of Technical Analysis:
A- Technical analysis focuses on price.
B- It also focuses on supply, demand and price actions.
C- It works on identifying support and resistance.
D- Price history plays a major role in the technical analysis.
E- Abet with an entry point, etc.
If one wants to get in-depth knowledge of technical analysis then he/she can take help from any stock advisory firms like TradeNexa. They will help you to trade effectively. In the form of Stock Future Tips and F&O Tips, they will help you to take the decision like- when to buy or sell.