How to learn Technical Analysis: Learning how to evaluate the price of the stock is the most important part of trading. And the probable movement in the price of the shares can be predicted with the help of technical analysis. It is the core skill individuals should have if they want to trade in the market.
But the problem is that many individuals may might it difficult to understand technical analysis as there are many concepts involved and choosing the right one that fits their style might be sometimes difficult. In this article, we will be discussing various things you need to know to understand how to learn technical analysis
What is Technical Analysis?
Technical analysis is the study of market data that enables you to forecast future asset prices. Technical analysts may employ market information such as support and resistance levels, demand and supply for security, candlestick patterns, chart patterns, and various indicators. But the most important factor while doing Technical Analysis is Price and Volume.
Assumptions of Technical Analysis
Before learning anything about technical analysis, there are three basic assumptions that are involved while doing technical analysis.
- Technical analysis assumes that anything that could affect the company will be reflected in the price of its shares.
- The price of the stock is likely to move in a trend that is established rather than moving against it.
- The final assumption of technical analysis is that price of the share moves in a pattern that tends to repeat itself. These patterns can be used by individuals to generate buy/sell signals.
Basics you need to know
The first step of how to learn technical analysis is to understand the movement of share prices in the market. The following things will help you get familiar with the price movement of a share:
1. Identifying the trends in the market
A trend is defined as the direction the in which the market is moving in. The trends can be categorized into an uptrend, downtrend, and sideways trends.
The markets are said to be on an uptrend when they are moving in the upward direction and when they are moving in the downward direction it is called a downtrend.
When the markets are moving in a range between two price levels it is called a sideways trend.
An individual can plot these highs and lows by drawing horizontal lines which can make it easier for you to identify the trends and place trades in the market. These trends can be used by beginners to place their trades in the market.
To know more about trading using trends you can go through our article on “what is a higher high lower low strategy in trading”
2. Identifying the support and resistance levels of a share
Identifying the support and resistance levels is another important step in learning technical analysis.
Support is a price level of the share where the demand for the share is more than its supply. You will know that a price level is acting as a support when the price of the security is not moving below a particular price level. There is a major tussle between buyers and sellers here.
Resistance is a price level of the share where the supply for the share is more than its demand. You will know that a price level is acting as a resistance when the price of the security is not moving above a particular price level.
Understanding the support and resistance levels can help you understand the entry and exit levels. It will also help you set your targets and stop loss in the market.
3. Understanding the Volumes of a share
Volume is another important concept that an individual should learn in technical analysis. Volumes will help you give a confirmation about the ongoing trend in the market.
An increased volume during an ongoing trend gives confirmation about the continuation of the trend and a decrease in the volumes during an ongoing trend can indicate a reversal in the trend.
4. Understand the Candlestick charts
Another important process in learning technical analysis is studying the candlestick patterns. There are different types of candlesticks that one can learn in the market. These candlestick patterns will help indicate the trend in the market.
Indicators in Technical analysis
Another important step of how to learn technical analysis is using the technical analysis indicators. These indicators help the individuals to add confirmations to the analysis they have made. Here are some generally used indicators while doing technical analysis:
1. Moving Averages
This indicator shows the average price which is plotted along the closing price of the share. These are plotted on an average of 10 days, 20 days, 50 days, and 200 days basis. Simple Moving Average (SMA) and Exponential Moving Average (EMA) are some of the common forms of moving averages.
A simple moving average (SMA) is calculated by adding the closing prices within a particular set of timeframe and then dividing it by the number of days in the timeframe.
Exponential moving averages are also calculated in a similar way, but here the recent values are assigned more weightage than the older prices.
Individuals usually prefer EMA over SMA while trading as there is a time lag involved in SMA
2. Relative Strength Index (RSI)
RSI indicator charts the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. It indicates whether a stock is overbought or oversold in the market. It moves along the range of 0 to 100 where a range below 30 is considered oversold and a range above 70 is considered overbought.
3. Bollinger band
Bollinger band is an indicator that consists of standard deviation lines plotted above & below the price and a simple moving average along the price. These lines represent the volatility range as the price goes up and down. This indicator helps you know whether the price is high or low on a relative basis.
4. Momentum Oscillators
This indicator tells you about the existing momentum in the price of the security. The values in this indicator generally oscillate near 100. The upward momentum is said to be dwindling when the value in the indicator is less than 100 and the momentum is said to be positive when the value is above 100.
Places you can Learn Technical Analysis
Now that we have covered what you need to learn in technical analysis, the next step is to get a deep understanding of these concepts. Here are various ways through which an individual can learn technical analysis
1. Reading Books on Technical Analysis
The classic way of gaining a good fundamental understanding of technical analysis is by reading books. There are several books out there that have been written by experts that help you get a better understanding of technical analysis.
To know the books you can read regarding technical analysis can go through our article on “Best Books on Intraday Trading”`
2. Learning through online courses
There are lots of courses out there that can cater to specific needs and can help you learn technical analysis. One such place for learning is through joinfingrad.com.
Joinfingrad is a financial education platform focused to offer various stock market courses. You can avail any number of courses on our website with a time-based subscription.
In this article, we covered what is technical analysis and the process on how to learn technical analysis.
Before jumping into trading, it is important for an individual to understand how technical analysis works. Trading with no proper knowledge can lead an individual to lose money. You should also keep in mind that you will not become an expert just by reading some books and watching some videos on trading. It will take a lot of practice for an individual to get better at trading, which is why you need to have a lot of patience in the learning process.
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