Basics of Technical Analysis:
Technical Analysis is the assessment of the past price movements to forecast the future price movements. Technical analyst believes with the help of charts its possible to identify the trend, invest or trade based on trend and make money as the trend unfolds. Objective of technical analysis is to forecast the direction of the future price. It serves the purpose of the map. Without proper technical analysis, if we invest or trade in stock market, its like trying to aim by firing in dark. Short term traders can take advantage of charts by knowing short term supports and resistances, and make the most of it. Long term investors can use technical analysis to know the long term trends, so that trader can stay invested, and cancel out the short term volatilities, which could make them worry. On the otherhand, short term investors can use the same volatility to their advantage, and based on various supports and resistances, they can trade various ranges.
If we take stock market as a battlefield, then technical analysis serves the purpose of weapons. If we enter into the battlefield without any weapons at hand, the result is evident to all. So without the knowledge of technical analysis, if you enter the stock market, its like entering the battlefield bare handed. If anyone want to win in stock market, that person have to obtain the necessary skills to win in it. But by not doing this, Whatever the loss the person make, that person is responsible for it and not the market or anyone else.
Supply and Demand:
The fundamental basis for technical analysis is that prices shift with supply and demand. If the demand exceeds the supply, the price will rise. If the supply exceeds the demand, the price will fall. Charts reflect this rise and fall.
The purpose of charting prices is to identify price trends as they begin to develop and to make trading decisions based on that trend. Another way of identifying the price trends is by looking at past price movement. Certain patterns have been identified over the years and it is assumed that these patterns will continue into the future.
On a chart, prices are reflected in a series of peaks and valleys. The direction of these peaks and valleys make up the price trend. An upward trend would have cycles of consecutively higher peaks and valleys. A downward trend would have sequences of succeeding lower peaks and valleys. A sideways trend would have a series of successively level peaks and valleys.
When the price is in an upward trend, demand exceeds supply and we are in bull trend, pushing prices higher. When the price is in a downward trend, supply exceeds demand and we are in bear trend, pushing prices lower. When the price moves sideways, supply and demand are in balance.
In addition to the trend direction, trend is also broken into three categories-major, intermediate and near-term trends. Time lines for each of these categories will depend on the type of trading. For example, future traders have a shorter trading time span stock market traders because futures contracts expire and stocks do not.
Major trends will fast for a specific period of time. Intermediate trends would have a time frame within the major trend and would be reflected as a correction in the major trend. Near term trends are shorter periods within the intermediate trend that would indicate buy and sell positions. For example, if the intermediate trend is up, a short term downward trend may be an opportunity to buy. If the intermediate trend is down, a short term upward trend may be an opportunity to sell.
Typically, to determine the tentative trend, there must be atleast two low positions with second low higher than the first to indicate an uptrend, or two low positions with second low lower than the first to indicate a down trend.