By examining statistical trends gleaned from trading activity, such as price movement and volume, technical analysis is a trading discipline used to assess investments and spot trading opportunities. Technical analysis focuses on the analysis of price and volume as opposed to fundamental analysis, which seeks to determine a security’s worth based on financial metrics like sales and earnings.
The impact of supply and demand on changes in price, volume, and implied volatility is examined using technical analysis tools. It operates under the presumption that, when combined with suitable investing or trading rules, historical trading activity and price changes of a security can serve as valuable predictors of the security’s future price movements.
It can help improve the assessment of a security’s strength or weakness compared to the overall market or one of its sectors. It is frequently used to generate short-term trading signals using different charting tools. Analysts can refine their overall valuation estimate by using this information.
Technical Analysis in Nepal
Fundamental analysis examines the health of the company, whereas technical analysis does not. A corporation is assessed using technical analysis based on price movements and trading volume. Technical analysts make predictions about upcoming trends and patterns using price movements and trading volume. According to technical analysts, a company’s financial statements and intrinsic value are not necessary to be examined since the stock price already represents all pertinent information.
Combining fundamental and technical analysis is a common practise among modern investors, and it makes sense to do so. Investors can choose an undervalued firm by using fundamental analysis, while technical analysis can help them time the market and sell their stock at the proper time. However, based on their investing plan, time horizon, risk appetite, and other criteria, an investor may choose to remain with one particular way. In general, neither method is superior to the other, and both are highly effective. Given your investing plan, it is advised that you conduct your own study before deciding which method to use or whether to combine the two methods.
Major Tools Used for Technical Analysis
“The ability to perform technical analysis gets better with practise and education. Always keep studying and being a student”. John Murphy
In the distant past, buying and selling stocks was a straightforward game. But it isn’t anymore. Technical analysis is both an art and a science that allows investors to create new technical analysis indicators by forecasting future prices based on historical price movements.
Here are top 9 widely used tools for the technical analysis
- The On-Balance-Volume indicator (OBV)T
A specialized examination marker called the On-Balance-Volume can be used to measure the positive and negative volume stream in a security over time. A force marker that measures both positive and negative volume streams could be the culprit.
Joseph Granville was the one who came up with this indicator. In his opinion, the price will eventually jump up when volume increases sharply without significantly changing the stock’s price, and it will eventually jump down when volume decreases sharply without significantly changing the stock’s price.
- The Accumulation Distribution Line
The most popular technical analysis indicators for determining the money flow into and out of a security are accumulation and distribution. Marc Chaikin created this indicator to track the overall money flow into and out of the security. The Cumulative Money Flow Line was the previous name for this indicator.
By identifying whether investors are buying (accumulating) or selling (distribution) a specific stock, this indicator aims to determine supply and demand.
- The Average Directional Index (ADX)
A trend indicator called the Average Directional Index (ADX) is used to gauge a trend’s strength and momentum. Trading in the trend’s direction lowers risk and boosts potential earnings. When determining whether a price is strongly trending, analysts use the Average Directional Index (ADX). Based on a moving average of price range expansion over time, ADX calculations are made. 14 bars are the default setting.
A technical analysis indicator called the Aroon Indicator is used to determine whether a security is in a trend. It is employed to determine when trends are most likely to change course. This indicator counts the number of ticks that pass before the price reaches its highest or lowest points within a given timeframe. The “Aaroon up” line and “Aroon down” line make up the indicator. The “Aaron up” line gauges an uptrend’s strength, whereas the “Aaron down” line gauges a downtrend’s strength.
- Moving Average Convergence Divergence Indicator
The relationship between two moving averages of the price of a security is displayed by the momentum and trend following indicator known as Moving Average Convergence Divergence (MACD).
- The Relative Strength Index (RSI)
In order to determine whether the stock is overvalued or undervalued, this momentum indicator measures the size of recent price changes. J. Welles Wilder was the person who first created this indicator.
RSI can be broken into two basic components:
- RSI Average Gain
- RSI Average Loss
- First Average Gain = Sum of Gains over the past 14 periods / 14.
- First Average Loss = Sum of Losses over the past 14 periods / 14
- Average Gain = [(previous Average Gain) x 13 + current Gain] / 14.
- Average Loss = [(previous Average Loss) x 13 + current Loss] / 14.
7. The Stochastic Oscillator
An indicator that gauges the current price in relation to the price range over a number of periods is the stochastic oscillator. George Lane created this indicator. It is used to contrast the closing prices of securities over a chosen time period. 14 periods are most frequently used in stochastic.
As discussed above these technical analysis indicators help us in earning profits. It will be much better if we use the combination of 2-3 technical indicators while selecting stocks.