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As stock traders, we are often intrigued and at a loss to decide when we encounter questions like of “what stocks to buy”, “when to buy those stocks”, “what stocks to sell and what to keep” and finally “when to sell your precious stocks”. But you need not worry or fear chances of wrong decisions if you introduce to your business the not so complex concept of technical analysis. You should to know and go for understanding technical analysis.
Technical analysis is an analytical process in stock trading. It is the technical study of the stocks at hand through the use of something known as technical indicators. This is done in order to try to forecast future price variations in the stock under the scope of study.
Technical Indicators are, simply put, depictions of various “price points” on the stock charts. These price points are based on certain pre-set formulae. Apart from the indicators, something known as Trend Lines can also be used. Price points can be connected with each other through the use of these trend lines. Basically these trend lines connect the high points with the low points in the graphical representation or stock charts as they are known. While rendering Technical Analysis, these charts which have the above-mentioned technical indicators are added to the charts to find out patterns that have happened previously under a specific set of conditions. Once these particular trends are recognized, the Technical Analyst or Trader then investigates for identical or alike conditions that occurred in the past which might occur again. As soon as these conditions are marked once again, one can use the knowledge gathered from those past studies to make a firm and almost fool-proof purchase or sale decision. This way, the past guarantees, if I am allowed to say so, the success of all future endeavors made within the scope of the exhaustive analysis.
We can now move over to the most common technical indicators that are used to study certain stocks. They are as follows:
- Analysis pertaining to Volume
- Analysis related to the study of Relative Strength Index or RSI in short
- Moving Average Convergence Divergence or MACD analysis
- An exhaustive Stochastic analysis
- Retracements using the Fibonacci formula
- Commodity Channel Index Study or CCI study
- Bollinger Bands
- Generally speaking, most of the above mentioned indicators are used either above or below the stock chart. Some times, they are represented separately too. There is the concept of “Overlays”. Overlays are nothing but the indicators that are put on the chart itself. They are generally seen in the Bollinger Band charts.
Other kinds of analyses
There are other kinds of analyses too which are regularly used along with Technical Analysis. They are known as Fundamental Analysis. Some experts also like to call it Quantitative Analysis. Technical analysis and fundamental analyses are put to use together to forecast suitable trading conditions that will show up in the future. But then again many traders prefer to only use one type of analysis to make their forecasts. So these analyses are both people specific and case specific.
Thus we have briefly seen how the use of technical analysis can help us in making that ever important financial decisions of “what stocks to buy”, “when to buy those stocks”, “what stocks to sell and what to keep” and finally “when to sell your precious stocks”. These are very important so that you get the perfect stocks in the market. You might have seen some people who do not make any good research of the market and they invest their money in it. This is a very wrong way of investing in the market. Share market is full of risks and so you have to make the best possible research to invest in the market so that you can be in a profitable situation. You have to know how to read the sensex as well as this would help you in making a good estimate of the different stocks in the market.
Hopefully, all your apprehensions and fears about making wrong decisions will minimize (if not disappear) if you devote some time to understanding technical analysis.
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