We divided Technical Analysis in below Two Parts :
Technical Analysis Method
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History, Philosophy, Basic Tenets of Technical Analysis
Technical Analysis is study of the past price action to predict the future price Trends. This means that the price of a share tells us as to how the share is going to move in the future and any reasons, let it be Fundamental or Technical, that could lead to a rise or a fall in the share prices is reflected in the price of that share. To give a simple example if a company is going to post excellent results, this will be reflected in the share price with a good rise which will be on account of insider buying. Similarly the opposite of this also is true. What we saw above was a fundamental factor responsible for the movement in the share prices. Besides these Fundamental factors there are Technical Factors viz. the Laws of Demand & Supply which also could lead to sharp movements in the share prices. These factors work on Mass Psychology and are closely linked to he Human Mind, under a given set of circumstances all minds tend to work in the same direction. The theories of Technical Analysis are based on this concept and hence the share price movements can be predicted more often than not based on these theories.
Hence Technical Analysis is a subject which can successfully identify the beginning of a sharp rise or fall in the sharp prices. However, its is incorrect to say that Technical Analysis can predict the share movements correctly all the times, as at certain times the markets itself are undecided.
Through Technical Analysis is being practiced in the West as well as some Asian countries like Japan for more than past 100 to 150 years, it has become popular in India only in the last 8 to 10 years.
To sum it up Technical Analysis :
The basic difference between Technical Analysis and fundamental Analysis is that FA tries to find reasons for a stock to move up or down and based on the reasons predicts the price movements whereas TA is not concerned with the reasons and it believes that the way a stock price moves currently tells you where it is heading for in the future.
- A study price charts i.e. past prices in conjunction with the present.
- Works best in stocks that have a mass following.
- Is based on the law of Demand and Supply.
- Depicts the mindset of masses i.e. mass psychology.
Advantages of Technical Analysis
- It is independent of any news or occurrence of events as any of these are reflected in the stock price.
- Most of the Fundamental information such as announcement of Results or any other which affects the price of a share reaches a common Investor the last but an Investor following TA can get early signals based on price movements through he may not know the exact nature of information.
- Since TA is based on Mass Psychology which can change and is fluctuating at times, Technical Analysis recommends use of Stop-losses which if strictly implemented can save Traders and Investor from a much bigger loss in the future.
Limitations of Technical Analysis
- If not backed by proper study of Fundamentals, TA cannot distinguish between small moves and big moves as well as Stocks that move on support of masses and stocks that are manipulated by a few individuals or groups or so called Operators.
- Many a times Stop-Losses based on Technical Analysis get trigerred in sideways moves and the price moves back to its original level or as expected.