Technical Analysis

Technical Analysis is the study of past price behavior to calculate the future price action. Technical analysis is used to measure the depth of the price action, its sustainability at higher or lower levels and direction of the future prices action on break out of the levels. It help traders in fixing the predefined entry levels, tight stop loss and pre-calculated profit booking beforehand the execution of an actual trade, to maintain high percentages of winning trades.

The phrase “trend is friend” always holds good in the market, technical analysis helps traders in finding the trend.

Most of the times, prices moves within the technical levels until break out happens or some fundamental changes. Well, fundamentals are beyond our reach and on many occasion, price action already had taken before the news reaches us. Whereas, technical indicators spontaneously alerts on sudden change in fundamentals. Every price levels are pre-defined; we are just required to understand the importance of these levels, to make the profitable trades, on intra-day as well as on delivery basis. Knowledge is more important than capital and trading success depends on knowing the right indicators and applying them consistently. Technical indicators are divided into two categories i.e. Leading and Lagging indicators, whereas most of the technical indicators are lagging indicator. Moving Averages, RSI, Stochastics, MACD are some examples of the lagging indicators. These are called lagging indicators because of their nature of indication/identification are lagged behind market action and they provide indication only after the fact happens. Whereas the leading indicators, indicates beforehand the likely support and resistance levels. The price behavior at the pre-determined levels forewarns the potential strength or weakness of the price action. Oscillators mainly qualifies as major leading indicators and they fluctuate into overbought and oversold conditions. Relative Strength Index (RSI) and the Stochastics Oscillator well known leading indicators. Leading indicators provides strongest signal in sideways or non-trending trading ranges periods. Leading indicators lead the price action and Lagging indicators follow the price action. Whereas, lagging indicators are best during trending periods. Proper balance can be achieved by mixing leading and lagging indicators across different time frames. Lagging indicators provide comfort as on firmly establishment of the lagging indicator in a given direction, traders see the move and this provides the necessary liquidity in that direction.

How to get trading signals from Indicators:

Crossovers and Divergence provides best buy and sell signals. Crossovers occur on moving of the indicator through an important level. It signals shifting of trend and that leads to movement in the price. Divergence occurs when the price trend and the indicator trend moves in the opposite direction. Divergence is divided into two parts, positive divergence and negative divergence. Positive divergence happens on upwards trending of the indicator at times when the price is trending downward. This signifies bullish signal. Negative divergence provides bearish signal on weakening of the price momentum during an uptrend.

These indicators are freely available on most of the charts and should be applied for analyzing the price action.

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