If you are new to trading or have been trading for a while now, you have certainly come across the term, ‘technical analysis’. When you are investing in any asset class or market, you would need information handy to understand the trade. There are two types of analysis you would need: fundamental and technical analysis.
While fundamental analysis involves getting a grasp of macro factors such as looking at balance sheets, studying the industry, and the company’s books, for instance, technical analysis is all about charts, patterns, and statistical tools that help a trader understand the market trend. It helps a trader assess a certain stock with the help of charts, lines, and patterns. It helps look at price movements on the basis of the specific asset’s history on the chart. The asset’s price and volume in the past are taken note of, for predictions.
Technical analysis is used in stock markets, derivatives, currencies, and commodities trading as well. The asset in question could be a stock, gold, currency pairs, futures, and so on. So, while in the stock markets, technical analysis helps you identify the movement of stock prices and market trends, the same goes for commodities. Take, for instance, gold trading. Gold prices tend to fluctuate daily not merely on the basis of supply and demand but on other factors such as government policies, actions of central banks, currency-related changes among others. This makes it pertinent to base any gold trading decisions based on gold technical analysis.
Trading the yellow metal using gold technical analysis would mean looking at the gold price charts and using tools that tell you about possible future movements.
Irrespective of which security you are trading, there are certain tools that come in handy. They include:
Chart patterns are widely used in technical analysis; they form several shapes that help in predicting reversals and breakouts. Volume and price are the two factors that are analyzed. You could use lines, bar charts, or candlestick formations. Candlestick charts form a series of candles that help understand the price movements of a currency or security. There are many types of candlestick charts and patterns to analyze a security.
There are many versions of this indicator in technical analysis. It helps identify the direction trend of a security. The average price covering a specific period such as 10 days or 10 weeks or any time duration chosen by a trader is taken and constantly updated so that a price trend emerges after the ‘noise’ is eliminated. By comparing the average of prices from one specific timeframe with a similar subsequent timeframe, you can arrive at a trend.
These are calculated on the basis of price and volume data and help you ascertain the asset’s momentum and its likelihood of continuing. An example of a momentum indicator would be the relative strength index or RSI, which measures the amount of price change recently. It helps measure the amount of change and speed at which price movement has changed. The RSI is among the most popular gold technical analysis indicators as well and indicates a bearish or bullish gold trend.
What are the benefits of technical analysis?
It helps a trader or investor predict a certain trend of the market. Charts help traders spot uptrends, downtrends and sideways movements. So if the market trend is moving up, you could use the opportunity to buy in. If the market trend is downward, you may use the opportunity to sell.
This form of analysis helps you understand the concept of momentum, and whether the trend is a positive one or not. When a certain stock breaks above the resistance level or below the support level with enough volume and strongly, then it indicates momentum. Support is when a downtrend is likely to hit pause because demand is concentrated. Resistance is when the uptrend is likely to hit pause owing to a high interest in selling. Also when the uptrends are forming tops and bottoms that are higher and the downtrend is forming bottoms and tops that are lower, it confirms momentum. Momentum is important for you as a trader as it allows you to stay on its side.
Timing your entry or exit plays a key role in any form of trading. This form of analysis helps you predict the appropriate time to enter or exit a trade. This is enabled by candlesticks or moving averages, for example.
Basic principles on which technical analysis rests
Technical analysis helps you focus solely on the chart and the price, which is at the heart of any form of investment. At its core, the analysis rests on the belief that the price is reflective of all the information that impacts a certain market or asset. It is this premise that leads analysts to understand how investors perceive the information or behave.
One of the pillars on which this form of analysis rests is that history repeats. Analysts believe that price movements are cyclical and looking at the past price movements helps make future decisions better. It is this principle that has led to chart patterns that track how the market has behaved over a timeframe or how prices have been changing.
As a trader, you will need a combination of fundamental and technical analysis to make decisions. While fundamental analysis assesses the intrinsic value of a stock or asset by studying the economy, industry, earnings reports among other things, technical analysis pertains to identifying trends and patterns that help you understand how a stock may perform in the future. Technical analysts don’t concern themselves about measuring intrinsic value of a security as the price factors everything.
Irrespective of whether you are interested in gold, stocks or forex trading, you would need to know the difference between fundamental and technical analysis. For gold, you will need to get an understanding of gold technical analysis tools and strategies. For others too, you will need to get a grasp of the tools and indicators involved. You could start by opening a demat and trading account and gain access to research reports and real time data that helps you make informed decisions.