Simplified: Stock Market Technical Analysis

In this episode, we discuss the basics of Technical Analysis and explain concepts such as price/volume, support/resistance and more.

Fundamentals of Technical Analysis

Technical Analysis is not only statistic analysis but also an art of using historic prices to get direction of future price trend. Over and above absolute prediction it assists traders to find an indication on price of a stock or an index in short term.

Below are the vital parameters which are utilized for analyzing charts:-

Price – It is the rate at which an asset/share/commodity can be bought or sold. It is the highest amount a buyer is ready to pay for a share

Volume – It is one of the most fundamental and valuable parameters to comprehend while reading a chart of a particular stock or an index. In simple words, volume is the entire number of shares traded in a stock throughout a trading period. A strong change in traded volumes can indicate a rise or a fall in prices.

Trend – After volume, trend is the second most vital tool for a trader. A blend of trend and volumes aids the trader to decide whether to enter or exit the trade.

Trend is classified as follows:

Uptrend: Price progresses higher. In this case every high is higher than its previous high and every low is higher than its previous low.

Downtrend: Prices shifts lower. Stock enters in to a lower top lower bottom structure.

Sideways trend or Consolidation: Prices move in a specific trading range or are trending sideways.

Trendline – The easiest way of determining a trend is with a "trendline." All that is required is two peaks or trough points to draw an uptrend or a downtrend.

Support and Resistance

Support level is the price around which the share/security/commodity has earlier found increase in demand. Traders use such historically proven levels to enter or exit a particular security.

Resistance level is a price around which a stock has previously found incremental number of sellers. Traders use such levels to exit a long position or even short sell a security.

What is Stop Loss?

Trading involves a lot of risk taking and Stop Loss is the vital tool which is used to limit trading losses. It aids to eliminate emotions from decision making and it also aids to better control a particular trade. A Stop Loss order costs nothing to implement, but, regular brokerage is charged once the Stop Loss price has been triggered.

How does Stop Loss work?

A Stop Loss order is placed to Buy or Sell a particular stock once price hits a set trigger price. There is no manual involvement in executing the Stop Loss order. While having several open positions in the market, Stop Loss order supports the trader from getting trapped on the wrong side of a trade, which also serves as a shield from unwarranted losses.

Trailing Stop Loss, vital tool to protect gains

A trailing Stop Loss is utilized once prices start moving in favour of a trader. It is a tool normally applied to protect profits. On its implementation, trailing Stop Loss allows an open position to follow the ongoing momentum and continue to profit till prices sustains the current direction. A trailing Stop Loss stands triggered if price reverse.

How to set a Stop Loss:

1. As per traders' discretion or loss he is willing to take.

2. Support & Resistance method.

As per traders' discretion

Before entering into a trade, a trader decides on how much risk he/she is willing to take in a trade. It is important for a trader to assess one's risk taking ability to effectively carry on trading activities.

Support & Resistance Method

Traditionally, it is observed that falling prices of a particular stock swiftly gets arrested at particular support levels. It is always logical to place Stop Loss just below these crucial support zones.

Speaker's Profile

Hadrien Mendonca

Mr. Hadrien Mendonca was a Senior Technical Analyst at IIFL. He is an MBA in Finance and has over a decades experience in the Indian equity markets. His specializations include technical analysis, identifying momentum/swing trades and recommending investment ideas. His interactions with HNIs entailed investor meets, including provision of advice, apart from handling pan-India con-calls. His critical analysis helped him capture the March 2017 breakout on Nifty and Bank Nifty, thus delivering more than 11% and 16% returns respectively. His intra-day recommendations and delivery ideas have earned accolades from clients. Over the years, he has serviced the institutional desk and has held investment meets across India, helping clients get a better understanding of technical analysis to aid their day-to-day trade.

FAQs

What is Technical Analysis?

Technical Analysis uses historic prices to get future price trend. Over and above absolute prediction it assists traders to find an indication on price of a stock or an index in short term.

Why you should use Technical Analysis?

It aids in decision making, provides entry and exit strategies, helps in quick price forecasting and in finding trends in stocks or index.

I want to use technical analysis. How should I go about?

All you need to do is use our IIFL Market App’s free charting tool. Different charts equity/commodity, various parameters, oscillators and indicators, including everything is available for free on our App.

What are the basic concepts you should know before using Technical Analysis?

Price It's the rate at which a share can be bought or sold.

Volume Volume is the total number of shares traded in a stock throughout a trading period.

Trend A blend of trend and volumes helps the trader to decide on whether to enter or exit the trade. Trend is classified in three types: Uptrend, Downtrend and Sideways trend

Are linear charts better than log charts?

Linear charts are used while doing short term analysis while log charts are used while doing larger time frame or long term analysis. Both are vital in their own areas.

What is Stop Loss?

Stop loss is an important tool which is used to curb trading losses. It helps to reduce emotions from decision making thus aiding a better control on a particular trade. Regular brokerage is charged once the Stop Loss price has been triggered.

How does Stop Loss work?

A Stop Loss order is placed to Buy or Sell a particular stock once price hits a set trigger price. While having several open positions in the market, Stop Loss order supports the trader from getting caught on the wrong side of a particular trade, which also serves as a shield from needless losses.

What are important reads to better understand Technical Analysis?

Martin Pring Technical Analysis Explained

Robert D. Edwards and John Magee Technical Analysis of Stock Trends

John Murphy Technical Analysis of Financial Market

What should I do to learn trading?

One has to get familiar with the basics which would aid you with important insight on how to trade. Open a virtual account online to keep a tap on how volatile the desired commodities and stocks are and how to trade them. You can also read on the same, key books that could help you with learning are mentioned below.