How to do Technical Analysis in Stock Market?

Technical Analysis is an art/science that every wannabe stock trader must learn, if he or she wants to become a serious long-term professional trader. This is a skill that you should learn whether you are involved in stock market, forex, cryptocurrency, or currency.

And this is what we are going to learn in this article. Though this is a very long topic with various sub-topics (which deserve their own separate articles), but we will try to give you a comprehensive overview of this skill.

Table of Contents

• What is Technical Analysis?
• Goals of Technical Analysis
• How is Technical Analysis of a stock done?

What is Technical Analysis?

A trader is generally not concerned with fundamentals of a company or a stock, and even the current news (except some significant events like company quarter results announcement, some major geo-political event, macro-economic change, etc.). But he must learn the art of reading a stock chart, and data interpretation. This skill is known as Technical Analysis.

That’s because, unlike long-term investors that invest in a company share for months and even years, traders invest in a stock only for a few minutes or hours. Ideally, if you are trading, you should close your trade the same day you started it. Traders even trade multiple times in a single day. So, whether a company has good balance sheet, awesome management, healthy P/E or P/B ratio, huge assets/liabilities, etc. does not matter much to traders.

Note

As per some stock market experts (e.g. Kunal Saraogi), Technical Analysis is useful even in case you are investing in stocks for a long time. The candlestick charts that investors study are of very long duration – say a candle representing one week, one month or more. All the concepts and philosophies remain the same, whether you are looking at a one-minute chart or a monthly chart. We have covered candlestick patterns in a separate article.

Trading can be done in various manners – in cash, or through derivatives (options and futures). Technical Analysis is required in all of these.

Technical Analysis involves many sub-skills, such as learning to read candlestick patterns, using various stock exchange indicators, doing proper risk-management, etc.

Note

Trading without proper technical analysis is a gamble. Even after doing a thorough technical analysis you can only increase your probability of making profits, and reduce your risk. There’s nothing sure-shot or 100% in share market, or in any other such market for that matter, say forex, cryptocurrency, currency, etc. To be a successful trader, you need knowledge + tools/software + experience/practice. Without these you would just be gambling your money away.

Goals of Technical Analysis

To make money from a stock or index, we need to identify the trend of the market, right entry/exit points, etc. And these are the goals of technical analysis.

• Trend or Direction of the Market – We need to identify whether a stock/index will go up, down, or will move sideways. This is the first objective of a trader.
• Entry and Exit Points – Aim of a good trader is to invest in a stock/index as soon as he confirms that a stock is going to rise or fall. He will try to exit after making the maximum possible profit. For this purpose, we need to identify the various support and resistance levels. Support level is the price at which many buyers are willing to buy, and so they do not let the stock/index fall below that level. Resistance level is the price at which many sellers are willing to sell, and so they do not let the stock/index rise above that level. Generally, the graph changes its direction when it comes close to these levels (but sometimes it may also break them).
• Risk-Reward Ratio – A good trader is not necessarily the one who makes profits more often than losses. A good trader is one who maximizes his profits and minimizes his losses (i.e. he has excellent risk management skills). He does so by using various tools such as placing a proper stop loss, trailing stop loss, etc. While, a new trader may aim for 2:1 reward-risk ratio, some experts may target 3:1 reward-risk ratio, or higher.

Traders do not predict; they react. They trade based on the current price and trend of the stock/index (called price action). Technical analysis helps us take better and quicker price actions.

How is Technical Analysis of a stock done?

Though this is too wide a topic to be covered in one article, but we will list down some of the major tools, tricks, and tips used by traders in their technical analysis.

To identify the trend of a stock or index, traders use various tools, for example:

• they interpret the emerging candlestick patterns in the chart,
• they utilize various indicators available in their stock exchange platform, e.g. RSI indicator, moving average pattern, etc. (However, do not use excessive indicators – it will unnecessarily complicate your setup)

Based on all this they draw trend lines. It shows them whether a graph is going up, down, or is moving sideways.

Note

If moving average of last 10 candles is higher than moving average of last 20 candles, then it means that there is an uptrend in the market.

If moving average of last 10 candles is lower than moving average of last 20 candles, then it means that there is a downtrend in the market.

The time-length of a candle may vary from 1 minute to 3, 5, 15 minutes, and even more. Generally, intra-day traders observe candlesticks of 15-minute duration or less. The way a chart looks will vary depending on the time-duration of the candlesticks. A trader may have to observe candlesticks of various time-durations in order to draw a complete picture.

Thereafter, traders try to find out the various support and resistance levels. Expert traders can do this manually, while newbie traders can use a software. It helps them to manage their risk, and target a doable reward-risk ratio. It also gives them an idea when to enter or exit the market.

Idiosyncrasies in Technical Analysis

Trading analysis is both a science, and an art. It’s science because we make use of data interpretation, various indicators/tools, etc. It’s an art because it’s subjective – there’s no one best way to do this. Every trader has his own set of tools, indicators, and strategy to do so. You will develop your own strategy that works for you only with time and practice. Though we will list down various well-known strategies for you in separate articles. You may try them out and see if one or some of them suit you.

We will learn about all these various facets of technical analysis in separate articles. The aim of this article was to give you a bird’s eye view of this process. We hope you now have a fair amount of idea regarding it.