When people think of Technical Analysis – they either think of it as difficult or boring. It’s not.
Technical Analysis requires time and effort – but it can be both fun and easy to learn.
This article will contain information which you won’t find on most other websites.
We will keep it very simple and take real-life examples, which will help you clearly understand the basics.
Make sure you read this article till the end.
Why learn Technical Analysis?
Learning Technical Analysis is important for all types of traders. This includes intraday and swing trading.
But even if you are a long-term investor, there is one major advantage of learning technical analysis. Something which fundamental analysis does ‘not’ give you.
That advantage is – when to buy and when to sell a share.
This one thing – knowing approximately when to enter and exit a stock – can be a huge advantage in you becoming a successful stock trader or investor.
Technical Analysis can also help you make decisions on when to buy or sell a stock – without knowing anything about the company. You do not need to know the management, you do not need to analyze the balance sheet, you do not even need to go through the profit and loss statement.
Yet, you can buy or sell shares and profit out of them.
What is Technical Analysis?
In short, Technical Analysis is a way of predicting future price movement – by analyzing the price movement in the past.
Various tools and methods are used to analyze the price, the volume and other data points.
For example, a doctor checks the pulse of a patient. The rhythm and speed of the heart-beat gives him clues on the health of the patient.
How does the doctor decide whether there is a problem or not?
He uses his knowledge, which he has gained from reading about it from books. Or it could also be from the experience he has gained from treating other patients.
Based on this knowledge of history (past), he decides the future course of action.
Technical Analysis is very similar. It assumes that something that has happened in the past, could happen again in the future. History could repeat.
This is the basis of technical analysis.
How accurate is Technical Analysis?
Do not expect Technical Analysis to be 100% correct. Even 90% is a highly unrealistic expectation.
Earlier we used the example of a doctor and patient. Let’s take a different example this time.
You look up at the sky and notice there are heavy clouds and its windy. Since you have already seen such conditions in the past, you quickly understand – it will rain.
It’s a form of technical analysis that you do. You use your knowledge from the past (cloud + wind = rain) and predict the future.
But even then – sometimes it rains and sometimes even if there are heavy clouds – it may not rain that day.
Technical Analysis is similar. You can fairly accurately predict the movement of a stock, but you cannot ‘always’ predict it with 90-100% accuracy.
The price of the stock can suddenly move due to news. If India declares a war against China – all stocks will fall. Technical Analysis will fail here. Same thing happened during Covid.
When the finance minister announced corporate tax cuts last year – all stocks went up. Again, technical analysis or charts will not matter in such circumstances.
But these extraordinary events happen maybe once or twice a year. But as a trader, you trade much more regularly.
Back to the point, if you can get your technical analysis right 60-70% of the time, you can be a very successful trader. Be rest assured.
How much time to learn Technical Analysis?
Another important question. We all want to learn technical analysis as quickly as possible and start making money from trading.
But there are no shortcuts in life or in the stock market.
Learning technical analysis takes time and effort. It will appear difficult and confusing in the beginning, but within a few months you will get a lot of clarity.
Let’s take another real-life example.
You want to learn car driving. But is it easy in the beginning? When you change the gear, you will loose control of the steering wheel.
When you press the clutch, you also end up pressing the brake by mistake. It’s difficult to get the coordination right.
At this point, if you give up and decide car driving is too difficult – you will never learn to drive.
However, if you persist and just drive the car for a few days. Slowly, you will start getting it right.
Within a few days, you can control the steering as well as change the gear at the same time.
A few weeks later, you can drive without thinking. You can drive and chat with your family at the same time.
Driving in now in your sub-conscious mind. You drive without consciously thinking about it.
Learning technical analysis is the same. You need to start observing charts. You also need to keep an eye on the behavior of the price, the patterns that are forming. The candles that are getting formed due to the price.
Make it a habit of spending 15-30 minutes everyday observing the charts. Do this for 6 months – and slowly you’ll realise that sub-consciously you have started learning the price behavior.
You mind will start telling you – when this candlestick pattern is formed, the price will now start moving upwards. Your mind will start giving you inputs.
But this is possible only with time and effort.
Human Behavior and Technical Analysis
At most times, charts follow a pattern. And it repeats many-many times. Not just in one stock, but all stocks with high volume.
Not just in the stock market, but any publicly traded financial asset – where the market is open and millions are participating in it. For example, the price of Gold, Silver, Currency or Commodity. It’s all formed by demand and supply.
The price of a stock which you see on the screen – is its last traded price (LTP). It’s formed when the buyer and seller decide on one price – and close the deal.
The price is formed due to human behavior and like many other things that humans do – there is a pattern to it. This pattern gets recorded on the chart in the form of price and technical analysts use tools to analyze this pattern.
If you clearly understand the logic behind this, it’s actually pretty simple and straight forward.
Is Technical Analysis for Short Term?
There is a belief that technical analysis is used for short term trades – which is usually one day or a few days.
This is not true.
Technical Analysis can be used to analyze the movement of price for extreme short term to very long term – and this means, few seconds to many years.
This is a bold statement – but yes, you can use technical analysis to buy stocks for even a decade.
A car simply cannot start and go to the speed of 100 immediately. It has to start slow, gain momentum and then start racing at high speeds. A good driver will not smash the accelerator, he will steadily push it upwards.
Similarly, quality companies will always have quality stamped all over the chart. It’s for the technical analyst to have the necessary training and experience to be able to detect it.
Take the chart of a low quality company and compare it to a quality company over a 10 year period. One will be all over the place, the other will be mostly steady and predictable – even if its a cyclical business.
In the long term, a quality company will follow a 40-45 degrees upwards movement on the chart. It will steadily rise. It can stagnate in between and undergo corrections – many quality companies do – but eventually the movement will be upwards.
In between, you have to be flexible enough to change your mind if there is a clear indication on the chart. Even quality and promising companies can fail due to various reasons.
After all, it’s business and the biggest of businesses can also fail.
We have several examples in India – Jet Airways, Kingfisher, Vodafone Idea etc.
And there are examples around the world – Nokia, Kodak, Blackberry and even Apple before the legendary Steve Jobs returned to his own company and resurrected it in the early 2000s.
Even in such cases, when a company is in its early phases of a downfall – there will be indications on the chart. This is because the big and smarter investors – who have a lot of data, knowledge and experience – are usually the first ones to exit.
When they sell a stock, they leave a clear mark on the chart. All that we, as small investors, need to do – is to take the indication seriously.
Most of us buy when the stock has already risen a lot and sell when the stock has already crashed big. There lies the problem. Technical Analysis can help you rise above this problem and make fewer entry and exit mistakes.
How is technical analysis done?
It’s a vast subject. There is too much to it. It’s not possible to learn everything and you ‘do not’ need to know everything.
In fact, some excellent traders can do their technical analysis with any indicators. All they need is the chart with the patterns that the price has formed and nothing else.
However, a few simple indicators, along with understanding of candle sticks, support / resistance levels and the trend – is good enough for most people.
There is no point complicating it. In a complex world, simple is better.
- Chart type: There are 3 major types – Line, Bar and Candlestick chart. The last one is the most popular and most common – at least in India and many parts of the world.
- Trend: The direction in which the price is moving. Uptrend, Downtrend or Sideways.
- Support: A level where there could be buying, which will result in the price going up.
- Resistance: A level where there could be selling, which will result in the price going down.
- Time Frame: There are various time frames like 1 minute, 2 minutes, 5 minutes, 15 minutes, 60 minutes, 1-day, 1-week, 1-month and more. When you select a 1-minute chart, each candle will contain the opening, high, low and closing price of that one minute. Same way, a 1-day chart will contain the opening price in the morning, high / low of the day and closing price.
Some articles which explains the above concepts in more detail:
- Support and Resistance Level
- Live Candle Formation on Charts
- Different Time Frames in Trading Charts
- Types of Charts in Technical Analysis
- Technical Analysis for long term investment
- Moving Average Indicator Explained
Candle Stick Patterns
When the opening price, high price, low price and closing price – is given the shape of a candle, it’s called a candle stick chart.
As you can clearly understand from the image above. Green candles are Bullish – the price opens lower and closes higher. Red candles are Bearish – price opens higher and closes lower.
These candles are formed in different shapes and sizes on the candlestick chart.
All these candles put together, form a pattern. A technical analyst analyses these patterns and forms a conclusion on how the price could move in the future.
We have several articles on candlestick patterns on the website.
You can read them below: