Technical Analysis

Technical analysis is all about studying patterns in historical market data, in order to find out recognizable trends to predict future. This means charting historical market data (price & volume) and trying to find out some repetitive patterns, and hoping that it will again be repeated in future. By doing this, a technical analyst is actually studying the market behaviour under various supply and demand scenarios.

“They are a reflection of the trend in the hopes, fears, knowledge, optimism, and greed of market participants. The sum of total of these emotions is expressed in the price level, which is, as Garfield Drew noted, “never what they (i.e. stocks) are worth, but what people think they are worth”

Price of a stock depends on its supply and demand. If more people are interested in buying ITC, compared to the number of people willing to sell ITC, its price will increase. Technical analyst, while looking at historical patterns, is actually studying different supply & demand scenarios and trying to figure out at what price, supply is more than demand and vice versa. Suppose in a particular stock, the analyst is able to locate a pattern of behaviour historically. He concludes that in the future, when the same supply and demand scenarios play out, the stock price will once again behave as it did historically. According to technical analysis, this will happen because people are consistent in making their choices, when exposed to similar situations. So when they are exposed to similar demand and supply situation, they will behave in exactly same fashion as they did last time and as a result, stock will follow the predicted path.

Technical analysis helps you build a good POV (point of view) about the market. By POV we mean it can help you in deciding good entry & exit points, holding period and risk-reward ratios. It is best used for identifying short term trading opportunities in the market, but is also used for fine-tuning entry and exit points of long term trades. Thus, it is more about finding short term repetitive trading opportunities, to give you consistent returns. One of the most important things to keep in mind is that in technical analysis we are dealing with probabilities, not certainties. So it is a good habit to practise it with strict stop losses.