What is Technical Analysis?

Technical analysis is the method used to study the movements of the stock with the help of charts and indicators and to predict the postivie and the negative stocks or to say the hot stocks which may bring a gain in the intraday trading. The person doing the technial analysis is known as the technical analyst and he uses a lot of financial skills like keeping an eye on economic news of world and the country, volume of the stock traded etc. and then predicts which way the stock may move. Technical analysis gendrally helps the trading done on short term basis like the intraday trading or positional trading in which the stock is hold for 3-4 days. For predicting hot stocks for more period analysts use another method which is called fundamental analysis.  So to wind up in short technical analysis uses the chart of the company to predict price movements of the stocks for a short interval.

Importance of Technical Analysis

Intraday technical analysis is used to predict small price movements within the trading day. These price movements are generally around 1-2 percent of the stock price and if traded on a daily basis that is what is the amount of profit the traders are looking for when they trade on intraday basis. However, intraday technical analysis is able to predict large price swings. Generally, intraday technical analysis is only applicable within the trading day, and is unable to predict long-term price movements. But on some occasions intraday technical analysis might be used to predict 3-4 days movments in the price of the stock and bring more profits for the traders.

Applications

Day traders make use of technical analysis to plan their intraday trade and do many small trades during the day with the help of the technical analysis. Rarely do the intraday traders hold their stocks to the next day when using intraday technical analysis. Traders not only use the technical analysis to buy the stocks but also to sell the stocks or for short positions. These traders look at the technical analysis chart of the stock and an intraday volume chart to predict when is the best time to sell or short the stock. Also technical analysis provides insights into patterns of price movements of the stocks.

Some stocks show the same sort of movement at the same time of the trading day. Like their price increase on charts when the trading day starts and at the end the price fades away so by seeing the charts of the techincal analysis of the stocks the traders can come to know this daily behaviour and plan their trade for profit.

What does Technical Analysis consist of?

The analysts use mainly two items to perform technical analysis for intraday trading: an intraday stock chart and an intraday volume chart. Volume is the amount of shares traded. Through analyzing the volume of a stock, an analyst is able to predict if a stock is gaining momentum or fading. If a stock begins to have low intraday trading volume, the stock price is likely to decrease. In contrast, if the stock has an upward price trend and has an increase in intraday volume, the stock is likely to continue to rise.

Advantages

Technical analysis give the trading levels of a stock whether what is the level above which the stock is likely to go high or what is the level below which the stock may go down. These levels are called support and resistance. For example, if a stock is unable to go above Rs. 100, but has come near Rs. 100 multiple times, then Rs. 100 would be a decisive level. Analysts look at the chart's general movement on the trading day and the volume. If the volume is low, then the stock price is not likely to go up. In this condition the traders can go for buying the stock. And when the volume is high then stock price is likely yo go up. Traders can go for a short position and book profit in this condition.  Short selling is the act of speculating that a stock will decrease in price per share by borrowing shares from a broker to sell, then buying the shares back at a lower price.

Cautions

Technical analysis is always changing. A specific strategy may work for a few weeks or months, but after a while, the strategy may be less useful in predicting intraday price movements. Furthermore, stock trading is quite difficult. The market is a zero-sum game. For one trader to gain money, another trader must lose money. This makes using technical analysis particularly difficult.