Getting started in technical analysis : A beginner’s Guide

There are kinds of methods to follow while picking stocks in the Indian stock market. One can use fundamental analysis or technical analysis. The former involves using various kinds of ratios like debt to equity, or return on equity to make judgements on stocks that will yield profits in the long term. Technical analysis on the other hand uses various statistical measures to predict price movements. They use historical data, price and volume as parameters to track.

So what exactly is technical analsys – Technical Analysis is a method of evaluating investments by using statistical trends using its charts. The inherent belief is that past trading activity and price changes of security can be valuable indicators of the security’s future price movements.

Through concepts like price action, charting, candlesticks and technical indicators like RSI, Bollinger and Moving Averages, one can leverage and monetise the gap between intrinsic value and market price.

Technical Analysis is becoming increasingly popular as the concepts of demand-supply continue to rule the market trends.

Most fundamental traders too often use technical analysis to pinpoint the most lucrative low-risk buy entry points!

There are two different kinds of approaches to technical analysis. One is the top-down approach, while the other is a bottoms up approach. Short term traders tend to take a top-down approach while long term traders take a bottoms up approach.

The top-down approach firstly looks at various macroeconomic variables i.e it looks at the economy as a whole, then performs an analysis of a sector and finally looks into particular securities. The bottoms up approach follows a completely different route – it looks into securities that appear to have lucrative entry and exit points.

The first step to getting started in technical analysis is developing a trading strategy. Next one needs to identify the correct stocks as not all securtities will fit a particular strategy. Obviously it is imperative to have a decent brokerage acccount. Take note that a good trading account keeps costs low so as to not eat into profits, but at the same time offers the required functionality for monitoring a stock. Also depending on your trade time period you may require some additional resources – day traders for instance require margin accounts.

Also before you zero down on a particular strategy, don’t forget to backtest it. You can also look into practicing with a demo account before you actually begin your journey.

We also want to put out a warning here – there are many cheap online resources that promise to provide a platform that guarantees successful trades but this is a big myth. The software can only provide insights about the trend but it does not necessarily guarantee profits. It is up to the trader to interpret these.

A seasoned trader will tell you that the key to true trading success is identifying your best trading style and utilizing it to your advantage. You can be a high-risk trader or a low-risk trader (either work!). It’ll be a hard path for you unless you can identify the same and play to your strengths! The moral of the story is that trading is inextricably related to your personality, and the sooner you realize this, the better!

Trading is 97 percent psychology, therefore learning to control your thoughts, manage your hits and misses, deal with overconfidence and lack of confidence, and stick to your ideals is crucial. Only by learning how to filter out the noise, deal with FOMO, and stick to your Stop Loss or Target Price can you set yourself apart from other newbie traders.

In conclusion – Technical Analysis is a craft – one that needs to first learn and then be mastered through practice.

If you’re interested in learning more about technical analysis, check out our FinLearn Academy course on Technical Analysis, which walks you through the fundamentals of candlestick chart patterns and teaches you how to develop effective tactics for making profitable stock picks.