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What is Technical Analysis in Stock Market?

Technical analysis is quite a vast topic containing so many things such as candlestick charts, different types of technical indicators, price action, etc. In order to read the market properly, there are two types of analysis, Fundamental and Technical. Basically, long-term investors prefer fundamental analysis and short-term investors go for a technical one. Today, we are going to illustrate some of the main points regarding technical analysis or in short called TA. The content is about What is Technical Analysis in Stock Market?

What is Technical Analysis in Stock Market?

At first, let’s talk about ‘what is technical analysis in the stock market’ and how it works in the stock market. The technical analyst mainly analyzes the market sentiments, price movements, the volume of the stocks. They analyze the market with the help of past market price movements, charts, technical indicators. There is a clear distinction between fundamental and technical. Technical analysis is a methodology. By the analysis, one can forecast the direction of price through the study of charts, market data, various technical indicators while fundamental analysis considers the overall state of a company’s economy including production, earnings, environment, balance sheet, profit and loss, GDP, growth plan, export-import details, demand forecast, etc.

Now, let’s focus on the classification of technical analysis briefly, candlestick charts and technical indicators.

Candlestick Chart Pattern

Candlestick chart is a financial chart, also referred to as a Japanese candlestick chart. It shows the current market movements, price fluctuation. Each body of candlestick carries two points which refer to opening and closing point. The lines coming off from the candle known as shadows which indicate the highest and lowest price of a specific period. Generally, there are two types of candlesticks, bearish and bullish. Bearish refers to decreasing price while bullish refers to increasing price. Some of the vital candlestick patterns are Dozi, Spinning top, Marubozu, Hammer, Inverted hammer and Shooting star, Bullish Engulfing, Bearish Engulfing, etc.

what is technical analysis in stock market


Let’s start with Dozi chart pattern.

  • Doji Candlestick:  Basically, Doji candlestick consists of three patterns which are Classical Doji, Gravestone Doji, and Dragonfly Dozi. The shadow is longer than the body of a candlestick in Doji, so it doesn’t have any particular body. Here the difference between opening and closing price is too small. Dozi conveys that the previous trend is coming to an end.
  • Spinning Top:  The candlestick is with a small body and long shadows forecast the market reverse. Like Doji, the difference between the opening and closing price of the spinning top is also quite small. If the chart shows the spinning top, it means the market trend is about to reverse very soon.

Marubozu Candlestick:

It has a long body and almost no shadow at all. It can be bullish or bearish. It is very useful to indicate the market reverse.

Hammer Candlestick:

The pattern interprets bullish trend reversal. It has a small body with a long shadow. The candlestick always appears at the bottom. It shows how the sellers are trying hard to pull down the market but buyers remain optimistic and push the market up.

Inverted Hammer And Shooting Star:

These candlesticks are almost the same. Always after a downtrend, inverted hammer appears and predict an uptrend market while shooting star appears after an uptrend and predict downtrend movements.

Bullish Engulfing:

Bullish engulfing is made of two candlesticks, bearish and bullish. It comes after a long downtrend and predicts for an uptrend. 2nd bullish candlestick covers the 1st bearish.

Bearish Engulfing:

This pattern is also made of two candlesticks, bullish & bearish. It comes after a long uptrend and predicts downtrend. 2nd bearish candle completely covers the 1st bullish.

Technical Indicators- A Brief Discussion

Now, It’s time to discuss technical indicators. There are hundreds of technical indicators in the market, so, it’s not possible to focus on each and every indicator. Hence, I’m trying to give a brief introduction of five commonly used indicators, such as Moving Average, Moving Average Convergence Divergence or MACD, Relative Strength Indicator, Bollinger Band, Stochastic Oscillator.

what is technical analysis

Relative Strength Indicator (RSI):

Relative Strength Indicator, in short, RSI indicator, was developed by J. Welles Wilder. The indicator is mainly a momentum oscillator because the lines of the indicator oscillate between zero to a hundred. Basically, RSI estimates the speed and strength of the market trend. When the RSI line cross above 70, is known as overbought. The overbought situation must happen during a downtrend. It interprets that the time is accurate for selling the stock. Buyers’ time almost comes to an end.

On the other hand, if the line cross below 30 during an uptrend, it represents buy signal, the time is perfect to buy stocks.

Moving Average:

This technical indicator mainly works for long-term investment. Mainly, 50 days to 200 days is a proper set up for this indicator. Short-term moving average cross the long-term refers to Golden CrossOver.

Oppositely, if long-term cross the short term moving average, known as the Sell signal.

One point is quite important in this context if a stock price is higher than 50 days-200 days moving average, its consider as the false signal.

  • Moving Average Convergence, Divergence (MACD): There are some conditions in MACD. If the fast line and slow line are above zero, shows an uptrend and below zero represents downtrend.

When the fast line crosses and goes above the slow line, it’s a buy signal and when the fast line crosses and goes below the slow line, represents sell signal.

There are initial buy and sell signal also. If the fast line crosses the slow line and goes below it, called the initial buy signal. In the case of the buy signal, two lines must be shown below zero. Oppositely, if the fast line crosses the slow line and goes below it, refers to the sell signal, the lines must be shown above zero.

  • Bollinger Bands: The indicator looks like a chart, consist of two lines, upper line and lower line. If we see the stock price near the lower line, the price may increase and if we see the stock price near the upper line, the price may decrease.
  • Stochastic Oscillator: If the stock price is visible near up trading range, its an uptrend. Oppositely, if the stock price is visible near the downtrading range, it represents downtrend. This indicator shows overbought at above 80 and oversold at under 20.

Price Action

Price action is a technical trading technique which interprets recent market scenario and price movements. It helps investors to predict the market fluctuations. The chart is quite important to describe the price action. Basically, it’s an analysis based on other technical factors to see the upcoming market scenario.

There are mainly two steps in price action: Identify the scenario of the market and Analyse by using other technical tools.

Technical Analysis FAQ

What is the purpose of Technical analysis?

The key purpose of the technical analysis is to forecast stock price by analyzing previous data. Unlike, fundamental analysis, technical analysis doesn’t work with a company history or fundamentals. It is applicable, especially for the short-term traders.

What are the best technical indicators for day trading?

There are hundreds of indicators available under technical analysis but some of them are most popular. Like,
Moving Average (MA)
Bollinger bands (BB)
Momentum Oscillator
RSI (Relative Strength Index)
VWAP etc.

What are the advantages of Technical Analysis?

Though short-term traders generally use the technical analysis platform, it works for both long and short period. Technical analysis can apply almost in all segments like the Equity market, Commodity, forex, etc. So, it can be applied to any trading instrument as well as any timeframe.

How do you identify a trend?

Trend analysis is a well-known part of the technical analysis. The analysis helps traders to identify the trend and define direction. The most common and popular way to identify any trade is to use trendline by connecting higher highs and lower lows. Broadly, the market is always going through uptrend, downtrend or sideways.

What is Dow Theory of Technical Analysis?

The Dow Jones Theory or Dow Theory was developed by Charles Dow. It is one of the basic theories in technical analysis. The core element of the theory is price action reflects all relevant information about the market.

What is Technical Analysis in Stock Market- The Conclusion

So, it is quite obvious that ‘what is technical analysis in the stock market’ is basically a vast subject. Therefore, it is not possible to cover all the topics of ‘what is technical analysis in the stock market’ in a single write up. However, I’ve tried my best to cover all the important points here. ‘What is technical analysis in the stock market’ is quite important in terms of stock market trading.

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