Technical Analysis

Technical Analysis

Concept of Technical AnalysisTechnical Analysis attempts to explain and forecast changes in security prices by

studying only the market data. In other words a study of past share prices behaviour to

predict the future trend is termed as Technical Analysis.

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is Timing Of Investment, Decision, Buy, sell, Hold etc.

Study of market Bullishness, Bearishness , etc.

Liquidity in the market, Floating stock, Volume Turnover, Price trends etc.

Basic Principles of Technical Analysis

The Basic principles on which technical analysis is based may be summarised as follows :

1. The market value of a security is related to demand and supply factors operating in the market.

2. There are both rational and irrational factors which surround the supply and demand factors of a security.

3. Security prices behave in manner that their movement is continuous in a particular direction for some length

of time.

4. Trends in stock prices have been seen to change when there is a shift in the demand and supply factors.

5. The shifts in demand and supply can be detected through charts prepared specially to show market action.

6. Patterns which are projected by charts record price movements and these recorded patterns are used by

analysts to make forecasts about the movement of prices in future.

Dow Theory • Formulated by Charles H. Dow, the editor of the Wall Street Journal in U.S.A.

• Charles Dow formulated a hypothesis that the stock market does not move on a random basis but is influenced by three distinct cyclical trends that guide its direction. According to DOW Theory, the market has three movements and these movements are simultaneous in nature.

Primary Movements Secondary Movements Minor Movements

Dow Theory Primary Movements :This is the long range cycle that carries entire market up or down. This is the long-term trend in market. Generally the trend is for more than one year.

Secondary Movements :These reactions act as a restraining force the primary movement. These are in the opposite direction to primary movements and last only for a short while. These are also known as corrections and are for a period of 2-8 months.

Minor Movements :These are the day to day fluctuations in market. The minor movements are not significant and have analytical value as they are of very short duration.

Dow Theory Graph

Primary Trend , Secondary Trend & Minor Trend

Types of Charts

• Line chart

• Bar chart

• Candlestick chart

• Point and figure chart

• Price and volume chart

Point and Figure chart• It predicts the extent and direction of price

movements of a stock or a market index.

• These charts are on dimensional without any indication of price or volume.

• They show prices changes in relation to previous prices.

• It consists of series of X’s and O’s.

• The X’s represents upward price tends and O’s represents downward price trends.

Price and Volume Chart

• Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns.

• Volume should move with the trend. If prices are moving in an upward trend, volume should increase (and vice versa).

For example: TATA MOTORS