No stocks trader worth his name considers buying or selling without some kind of technical analysis. There was a time when technical analysis was relegated to a minority who believed in its veracity; nowadays, all major mutual funds and brokers have a battery of people who specialize in technical analysis. The advent of internet and globalization has made many excellent resources on technical analysis available to investors. However, technical analysis is too vast a subject to be covered by a single resource. Moreover, it is an evolving subject. The subject of these articles is to understand the basics of technical analysis.
What is Technical Analysis?
Broadly speaking, technical analysis is the study of prices used for stocks trading, commodity trading or forex trading, that makes use of technical charts (also called as stock charts) as the primary means of understanding price patterns. It can be safely said that Charles Dow, the progenitor of the Dow theory, is the chief architect of modern technical analysis.
Technical analysis is the examination of past price movements to forecast the future price movements. Technical analysts are sometimes referred to as ‘chartists’ because they rely almost exclusively on charts for their analysis of price movement.
The Theory behind Technical Analysis
The price of shares / commodities / forex follow the law of demand and supply.
The basic philosophy behind technical analysis is very simple: the market discounts everything.
The price of a stock / commodity / currency is dependent on many factors. A technical analyst believes that the price at any given time is the sum total of the demand and supply at that time, all the latest knowledge about the company, and the overall market situation. Thus, there is no need to study the fundamentals of a company, or keep abreast of the latest developments pertaining to the company – the share price already reflects it.
Day Trading (and trading in general) is the buying and selling of various financial instruments, such as futures, options, currencies, and stocks, with the goal of making a profit from the fluctuations of the buy and selling prices. Day trading differs slightly from other styles of trading in that positions are rarely (if ever) held overnight or when the market being traded is closed.
The vast reach of the Internet offers exciting options for day traders – short term investors who believe in profiting from changes in the stocks / commodities / forex market on a minute level. Typically, day traders believe in squaring their position within one trading session.
It is important for a day trader to be constantly in touch of the market, and track the movement of the price.
Day traders have to be very alert, and must possess a sound technical background to be successful. There are many examples of day traders who have lost their life savings, as they were not fully geared to operate in this demanding market scenario.
Today, most important exchanges offer online and real time data about the movement of a stock / commodity / currency. Using the right tools, a day trader can earn substantial profits from the fluctuation in prices.
Technical Analysis and Day Traders
Day trading was originally only available to financial companies (such as banks), because only they had access to the exchanges and market data. But over the last decade there has been a technology revolution and the internet means that today individual traders have direct access to the same exchanges and market data, and can make the same trades at very low cost.
For a day trader, the right technical analysis tools are a must. In normal circumstances, company information, availability of a commodity or the prices of currency do not change drastically and as such fundamental analysis proves to be ineffective for day traders. In the short term, these prices are dynamic and depend a great deal on the demand and supply at any given instance. Only the right technical analysis tools will help day traders achieve their goals in such a short term.