Technical Analysis OverviewThe investment decision is based out of two different ways:
Fundamental Analysis: Analyzing a company's financial statement
Technical Analysis: Understanding the market sentiment behind price trends
Technical Analysis
The study of statistical trends, collected from historical price and volume data, to identify opportunities for trade.
Assumptions of technical analysis
Market discounts everything
History tends to repeat itself (psychological)
Price moves in trend (reflexive)
Trend
A trend is the overall direction of a market or an asset's price identified by trendlines.
Three possible trends:
Uptrend: Asset going up, making higher highs or higher lows
Downtrend: Asset going down, making lower highs or lower lows
Sideways: Asset trades in horizontal channel
Technical Analysis considers: (Basics of Technical Analysis)
Price
Chart Patterns
Volume-Momentum Indicator
Oscillators
Moving Average
Support Resistance levels
Movements are not linear, the price will face resistance as it goes up or support as it goes down.
-Resistance: Level where an uptrend can be expected to pause or rebound due to a concentration of sellers.
-Support: Level where a downtrend can be expected to pause or rebound due to a concentration of buyers.
Technical Indicators broadly serve three functions to alert, to confirm, and to predict. There are two types of indicators:
Leading Indicator: Leads the pice, generates a signal for trading opportunities. Eg. Oscillators i.e. RSI, CCI, Stochastic, Williams %R, Momentum, etc.
Lagging Indicator: Follows trends and patterns, reduces the risk in exchange for missing early opportunities. Eg. Moving Averages, Bollinger Band, and MACD.
A few myths about Technical Analysis:
TA is only for short trading or day trading-
TA can be used in all time frames, from 1 minute monthly charts
TA has a low success rate-
Solely TA can give you profits if used effectively
Technical Analysis is quick and easy-
Continued success requires in-depth learning, practice, good money management, and discipline
Ready-made technical analysis software can be helpful-
Such software may provide insights about trends or patterns but cannot guarantee profits, use of backtesting is necessary
TA can provide price predictions accurately-
TA is about probability and likelihood, and not guaranteed thereby price ranges can be predicted
The winning rate in TA should be higher-
Profitability does not depend solely on win-rate, it also incorporates risk-reward ratio
Limitations of Technical Anlaysis
Tend to give mixed signals when used in isolation, confusing traders
TA is all about probability and signal cannot guarantee a successful trade even after thorough analysis
Often technical analysts use indicators in different methods and may form a biased view regarding the same stock
Many a time the technical signal may lag, and by the time proper signal is generated it is possible that the trade might be over
A single trading strategy may not work in all scenarios as markets tend to be extremely dynamic
Few Trading Mistakes Beginners Make:
Starting with real money
The best way to get acquainted with trading rules is to have a demo with virtual money before investing in real money, you can perform paper trades on Mudrex
Not examining situation by yourself
Make your own strategy, test them on the Mudrex platform, and then follow the same plan to trade by understanding things on your own
Inevitable Losses
Set risk limits for yourself and trade accordingly and accept the losses you face
Margin Trading in the beginning
It is not recommended to margin trade until and unless you understand the risk completely as crypto trading is rewarding yet risky
Following the herd
Before making a start with real money, make a set of rules which needs to be followed and have stop losses to limit the loss incurred on your trade
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