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Tuesday, September 15, 2020

Technical Analysis Overview

Technical Analysis Overview


The 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)

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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- Mudrex

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