Technical analysis is a study where we learn about stock’s price and volume behaviour and action. In across stock markets, millions of trades happen daily, and millions of dollars transactions happened every day. Now the question is how we can come to know what is happening around and how we can participate in that. So the answer is by the help of “Technical analysis”, we can understand all these actions and participate as well.
In technical analysis, we study price and volume action with the help of some professional tools. These technical tools might be any price or volume indicator or oscillator. All those professional tools work based on some mathematical calculations which I will describe later. For doing the study of price volume indicator or oscillator, we use a platform that is called “chart” and software. The chart is a two-axis graph whose X-axis denoted Time and Y-axis indicates the price.
Now the question is how a chart gets prepared? As I told, every second so many transactions occur, and the map represents that. On the map, we can define time-frame and check price action.
There are always two parties available in the market for completing a transaction. One is the buyer and the second is the seller. So when a seller wants to sell Stock A at Rs. P and buyer want to buy the same Stock A at Rs. P, then the only transaction happen, and that will reflect in charts. The point is “Chart reflects only executed transaction”, and by the help of that chart, traders take decisions.
Types of technical tools
- Technical indicator
- Technical oscillator
Technical indicator: it’s a mathematical calculation based on historical data of price volume and open interest. By analysing that historical data, we try to predict or speculate the future possibilities. There are two types of indicators:
Leading indicators: Leading indicators are those indicators which work on historical data and current price for predicting the future. These mainly work in a sideways market or non – direction market finding the breakout or breakdown.
Lagging indicators: Lagging indicators are those indicators which follow the price moments and act as a confirmation tool. It helps in booking profit or using trailing Stop loss in running trades.
Technical oscillator: it’s also a kind of technical indicator which is bound with a range somewhere 0 to 100. In these indicators, 0 represents oversold value, and 100 represents oversold value. There are also some very common non bound oscillators.
Now the question is how we take trade decisions?
Indicators generate signals in two ways. One is crossover and second is divergences. Crossovers help of taking the buy or sell decision while deviations help to identify trends strength and weakness. Indicators can help identify momentum trend and other aspects of a stock.