How to Use Technical Analysis for Stock Market Investing

Let’s assume you’re analyzing a share of stock for a certain company ABC Ltd. At the beginning, the stock is priced at ₹100, it rises to ₹200. Then it goes down to ₹150, and keeps moving up and down. How do you know if it’s a good time to buy or sell this stock? This is the point where technical analysis is relevant. It enables us to analyze stock price movements, and in turn, control their purchase for specific expected outcomes.

What is Technical Analysis?

Technical analysis involves the analysis of historical stock prices and the volume of transactions made. It helps in determining the likely next movement of the stock price. Investors use it to decide when to buy or sell stocks.

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Key Concepts in Technical Analysis

1. Price Trends

Stock prices usually follow three types of trends:

• Upward: When the price goes up.
• Downward: When the price goes down.
• Sideways: When the price stays the same for some time.

2. Support and Resistance Levels

• Support: It’s basically the downside of the price. Support means that the price drops to a certain level and then retraces back again. For example, if the share price reaches level ₹150 and rebounds, then ₹150 is the support level.
• Resistance: It’s like a ceiling. When the share price increases to a certain level and then falls back. For example, if the share price spikes at ₹200 and falls, ₹200 is the resistance level.

3. Chart Patterns

Chart patterns portray price movement of a stock for a given duration. Here are some examples:

• Head and Shoulders: This pattern indicates that the rise or fall in price will soon happen.
• Double Top/Bottom: A price pattern that indicates that the price might change direction.
• Flags: This shows short-term movements in the same direction.

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Tools for Technical Analysis

These tools help us see the trend and make decisions.

1. Moving Averages (SMA & EMA)

Moving averages tell us the average price over time. There are two types:

• SMA (Simple Moving Average): The average price calculated over a fixed period of days.
• EMA (Exponential Moving Average): This takes care of previous prices but more regard is paid to the current attached prices.

2. RSI (Relative Strength Index)

A RSI is a stock’s index that determines whether a stock is overbought or oversold. If there is an estimated RSI above 70, it means that the stock is becoming too overpriced. If it’s below 30, it might be too cheap.

3. MACD

MACD compares two moving averages to help us decide when to buy or sell a stock.

How to Use Technical Analysis:

Imagine that the share price of ABC Ltd. goes up from ₹100 to ₹200. It reaches ₹200 and does not go further up, which means ₹ 200 is a resistance level. After that, the price retraces back down to ₹150 and starts moving up again. Here, ₹150 is the support level. By observing these levels, we can analyse the time the stocks are likely to rise or fall and make a buy or a sell decision respectively. 

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Steps to Use Technical Analysis

1. Pick a Time Frame: Decide how long you want to look at the stock’s price
2. Look at Price Charts: Charts show us how the price moves over time.
3. Find Trends: See if the price is going up, down, or sideways.
4. Use Tools: Use tools like RSI or moving averages to help decide if the stock is a good buy.
5. Find Support and Resistance: Look for where the stock stops moving up or down.

Conclusion:

Investors use technical studies to comprehend how stocks move in their prices. It helps to look at patterns such as Moving Averages, RSI, and Support and Resistance, which in turn, enhances our ability to know the best time to buy or sell stocks. Make more of these stock market exercises, and I promise it will get much easier to read the stock market.