Technical Analysis Overview

15 בספט׳ 2020

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)
  

Trend
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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