Basics of Technical Analysis

There are two ways of analyzing securities: Fundamental analysis and Technical analysis. Both of these enable us to make investment decisions. In Fundamental analysis, we analyze the so called “Fundamentals” of a company in order to estimate the value of a security. This is generally a long term approach to analyzing the security and its behavior. On the other hand, Technical analysis involves analyzing the price movements in the capital market. It is generally considered a  short term approach of analyzing the market trends.

Technical analysis is the method of analyzing securities’ value by analyzing the movements of stock price. It is based on three assumptions:

1) The market discounts every information about the security,

2) History repeats itself and

3) The security prices move in trends

Based on the Security analysis, a Trend (which is the general direction in which the security is heading) is determined. There are three categories of trends: Up-trends, Downtrends and Horizontal trends.

As a discipline of analyzing security behavior, Technical analysis evaluates demand and supply, in a market, to determine the trend, which is most likely to be followed in the future.

Such trending is done on charts, which are graphical representation of price movement of the security in question. There are four main types of charts: Line charts, Bar charts, Candlestick charts and point charts

Thus, in Technical analysis it is assumed that all the information about a stock is embedded in its charts and we study charts to determine the trends.