Technical analysis is a tool of significant importance for traders in stock markets.It helps to identify the entry and exit prices for a trade in a security,be it a stock or index.It is based on the principle of ‘History repeats itself ‘ and ‘ security price discounts everything ‘
By definition,Technical Analysis is the technique of predicting future prices for a security based on past price actions for that security.All the past price actions are presented in the form of a chart.There are four types of charts commonly used in technical analysis:-
Out of these four charts,Candlestick charts are the most important.The advantage of using a candlestick chart is that it provides more detail of the price action of the security for the day,week,month or year depending on the time frame you are using for the chart.For instance,if we take the daily price action of a stock on candlestick chart,it shall show the opening price of the stock for the day,the high price touched by the stock,the lows made and the closing price at the end of the day for that stock.The use of a candlestick chart originated in Japan,so popularly called Japanese Candlesticks
These candles of each day or week or whatever the time frame lead to formation of patterns on the charts.These patterns are for short-term,medium-term or long-term time frame.These are of various types.For example:-
1. Head and Shoulders Pattern ( Bearish )
2.Inverse Head and Shoulders Pattern ( Bullish )
3.Cup and Handle Pattern
4.Symmetrical Continuation Triangle Pattern ( Bullish )
5.Symmetrical Continuation Triangle Pattern ( Bearish )
6.Wedge Patterns ( Bearish and Bullish )
7.Ascending Continuation Triangle Pattern
8.Descending Continuation Triangle Pattern
To compliment these patterns,there are Indicators and Oscillators which are used by the technical analysts to predict the price movement more precisely.These are also of several types like moving averages,momentum,Relative strength index,stochastics etc.We shall read about them in more datail in the coming articles.
Technical analysis is of utmost importance for a trader to take trading decisions.It is not that the price projections given by the technical analysis is 100 % accurate.The security may violate the pattern and move in an opposite direction than anticipated,it just gives the possibility of future price movement for the security which may or may not happen.There are several types of software available which a technical analyst may use for the analysis.