InvestorQ : I have just started analysing technical charts for my intraday trading. Can you tell me the few basic things that I must know before I start applying technicals to trading?
Arya Nanda made post

I have just started analysing technical charts for my intraday trading. Can you tell me the few basic things that I must know before I start applying technicals to trading?

Answer
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Dhwani Mehta answered.
1 year ago


Technical analysis is replete with weirdly named patterns and formations and they may sound quite abstruse and complicated. More of than not, they are actually quite simple formulations. Similarly, you will also find a plethora of techniques and exotic names to describe trends. But if you were to condense all these ideas and compress them into a handful of pillars, there are broadly four of them. Understanding these four pillars of technical analysis is at the core of technicals…

Point and Volume Charts: In fact these charts are the most commonly used charts in technical analysis and most technical packages will offer these point and figure charts. These point and figure charts are also called candlesticks and are important because they not only capture the closing price of the stock but also the opening price, closing price, high price and the low price. Thus the entire gamut of price movement is captured over a period of time. Additionally, the data on volumes is also captured to give a combination of price patterns and volume confirmation.

Moving Averages: You often find technical analysts on business channels talking about 100 DMA and 200 DMA to justify their view on the market. What they are basically talking about is moving averages. Moving averages are used to adopt a time series approach to stock prices and smoothen out the rough edges that may be created by abnormal movement in stock prices. One can use simple moving averages (SMA) or Exponential Moving Averages (EMA). Normally, critical moving averages of 100 days and 200 days act as critical supports and resistances and that helps traders not only to time their purchase and sale but also to specifically pinpoint their stop loss levels.

Supports and Resistances: Supports and resistances combine price trends with demand and supply scenarios. A support is typically a point where the demand volumes are strong enough to prevent the price from falling further. Technicals teach us to buy stocks around support levels and place stop losses below the support levels. Resistances, on the other hand, represent the level where the supply is strong enough to prevent the price from rising beyond that point. Traders typically sell around the resistance level and place their stop loss above the resistance level.

Momentum Indicators: Momentum indicators are leading or lagging indicators of a price movement. Leading indicators are useful because they help you to get indication of a likely rise of fall in stock price. Traders can then position themselves accordingly. Lagging indicators are more like a confirmation of a trend.

These four building blocks above are the basic theory on which technicals are based. There are also many advanced techniques that you could learn at leisure but once you understand the above four indicators you are good to go in your trading activity.