Technical Analysis of Financial Markets

5paisa Research Team Date: 16 Nov, 2023 06:33 PM IST


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Technical Analysis of financial markets is a trading discipline that evaluates investments and identifies trading opportunities. That is, it is the last leg of the stock market analysis. It uses charts and the market price of the stock to detect future patterns. Moreover, it helps investors to analyse the historical patterns as well for more accuracy.


What is Technical Analysis?

Technical Analysis is a tool financial analysts use to predict the price or movement of the stock price. It traces the price and its rise and fall in the stock market. Depending on the observation, it can make assumptions and predictions about how the price will fall or rise in the stock market in the future

Technical Analysis propounds that the buying and selling of all the participants in the market reflect all the information to the traded security. That allows one to assign a fair market value to the security.

One day the price of the shares went up. The next day it is down. However, if one notices the stock market, one can see a trend in the stock price. The charts study the patterns and trends and identify the technical players responsible for the changes.

Who Uses Technical Analysis?

Investors need to know how to use the technical Analysis of financial markets to their advantage. Retail traders use it to make decisions depending on the price charts of security. The other factor that plays a role in this is statistics.

Analysts use this method to forecast the price movement in the stock market. They consider supply and demand, stocks and bonds to make the Analysis. It tracks price changes through hundreds of patterns and signals.

Traders and investors find great help in the technical Analysis of financial markets. It helps to navigate the gap between intrinsic value and market price as it; leverages statistical Analysis and behavioral techniques. The technical Analysis is like a guide to the traders and gives them past information. It helps traders to make informed decisions. The technical analysts use the trend to buy out the stocks more to meet the needs of the trend.

How To Do Technical Analysis Of The Financial Market?

The technical analysis book suggests that one needs to have advanced technical tools to do a technical analysis of the financial market. The traders need to identify the major technical indicators. These are trends, momentum, volume, and volatility indicators.

Indicators like moving averages tell the trader that the stocks are going up or down. It helps in the identification of the way the stocks are moving. The Super Trend indicators show the current trend of the price movement.
The technical analysis course helps identify the market's overbought or oversold conditions. The graph moves upwards and downwards in these trends and invests accordingly. The traders can use volatility indicators like Bollinger bands to analyze the current trend.

The Bollinger band is a volatility indicator that shows the upheavals in the stock market. It indicates the volatility of the stock in the market. The middle band shows the average, while the other two show the extreme standard deviation of the stocks.

Before doing the analysis part, the trader must clean the chart. The technical indicators on the charts must be the ones that are part of your strategy. Avoid using too many indicators, as this could result in conflicting signals. After you perform the Analysis, track the observations. Write them down or highlight them when doing the technical Analysis of financial markets. Highlight the observations for more visibility, especially in an area of resistance where you think there will be no breaching.

Core Principles Of Technical Analysis

The technical analysis charts have three core principles: the market offers discounts on everything, price changes due to trends and countertrends, and the price action repeats itself. Certain patterns will recur.

1.     Market Discounts Everything

The market discounts everything, and the price of the stocks reflects their value. It includes facts, data, and the context of the market. The change in stock affects the price, and the market reacts to it. A single decision reflects the price and volume.

2.     Trends Dictate Market Movement

Trends determine the price. A trend moves in the same direction unless an interruption from an opposite pattern exists. The trends allow market investors to invest in stock and buy or sell them accordingly.

3.     Market Moves In Ebbs And Flows

The technical analysis pattern occurs in ebbs and flows. The investors use technical analysis tools to measure it.  Sometimes the graph zigzags; that is, it is unpredictable. Technical Analysis helps to explain the market psychology in charts and patterns. The highs and lows make the value of stocks fluctuate.

The financial technical Analysis also favors the market traders' sentiments and behaviors. It means if the traders feel positive about a stock, they will buy more. They tend not to buy or invest a small amount if they feel negative.

Technical vs. Fundamental Analysis

How does technical Analysis differ from fundamental Analysis? A good technical analysis example is to observe the price movement of a security and use the data to predict the future of the price movements.

On the other hand, the fundamental Analysis examines the economic and financial factors affecting a business. The technical analysts start their analytical process with the charts, while the fundamental ones look at the company's financial statements. The fundamental Analysis is a long-term process that approaches investing with a long-term goal.

In the case of technical Analysis, one can see the stocks in terms of day, weeks, or months While for fundamental Analysis. One can see the stocks in terms of multiple years or quarters, or decades.

Investors who prefer fundamental Analysis depend on the company's quarterly financial statements.

undamental analysts use a long-term time frame because the data they need to analyze the market generates slowly. Both technical and fundamental analysts use a long timeframe, and the data in the stock has a slower generating time than the price and volume data that the technical analysts use.

The technical and fundamental analysts have different financial technical analysis goals. Technical analysts try to identify the various short-to-medium-term trades where flipping a stock is easier for them. On the other hand, fundamental analysts try to make long-term investments in the stock's underlying business. One way to understand the difference would be if someone buys a home to resell it and someone buys a home to live in for many years.

The Role of Volume in Technical Analysis

Volume analysis is one of the many decisions that technical analysts use to inform their decisions. It analyzes trends in volume about price movements. It helps the investors determine the change in the security price.

The financial technical Analysis allows the volume to become the indicator of the market capacity. Rising markets increase in volume, and they are strong. When the prices fall on increasing volume, the trend gathers strength to the downside. Technical Analysis uses the positive volume index (PVI), which distributes the volume in technical Analysis.

The basic technical Analysis of financial markets has two indicators supporting the trading decisions- Positive Volume Index and Negative Volume Index. PVI and NVI depend on the previous day's trading volume and the security's market price. The increase in the trading volume from the previous day adjusts the PVI. When the trading volume goes down, the adjustment occurs in the NVI.

Identifying Trends and Reversals in the Market

Every once in now and then, there is a trend reversal that the market bears witness to. The trend reversal causes the stock prices to either drop or surge. A maturing trend sees buyers and sellers move toward an equilibrium stage.

The basic technical Analysis of financial markets means a high trend will create a higher trend high and higher lows. A reversal can happen in any period. The two poles act as resistance for the stocks. It offers a spot reversal to the new investor who can jump on a new trade. It could lead to a big win, loss, or break even.

A popular reversal trend is the Head and Shoulders trend. The head indicates the highest, and the shoulders indicate the lowest point in the trade. The basic technical Analysis of financial markets indicates the easy identification of a downtrend's end and an uptrend's start.


With technical Analysis, one can invest in better trends and know the market they want to invest in. Technical Analysis allows investors to analyze the important market trends that govern the stocks' value. Any change in the trend can affect the price of stocks. It is a serious question of profit or loss.


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Frequently Asked Questions

Fundamental Analysis measures the intrinsic value of the stocks, whereas technical Analysis considers the statistical trends when analyzing the price and volume of the stock.

One can read the price charts in the financial market by following the "Head and Shoulders" method. The reversal patterns indicate the price movement, and analysts can track these patterns to analyze the rise or fall of the stock market price.

Analysts can use technical Analysis on financial markets and asset classes. They can use technical Analysis on bonds, equities, real estate, etc.

The investor should mark every peak and trough. A downtrend indicates support level is in the lower peak, and the resistance will also stay in the lower peak. In an upward trend, the support level stays in the higher-low peak while the resistance is in the higher-high peak.