What is the market trend? When should I consider buying? What's a good selling price if I'm profiting? When should I sell if I'm facing losses? What's an appropriate amount to invest in a stock?
Technical Analysis examines price movements to help address these inquiries by analyzing past market behavior and historical data.
Why do we use Technical Analysis? Why is it important to compute entry or exit levels while trading?
It's like shopping for a laptop or phone online. We research brands, features, and customer feedback to find the best fit for our budget and needs. Likewise, in trading, we filter opportunities with low risk and high reward potential.
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What are we trying to find out using Technical Analysis?
In simple terms, it's about understanding supply and demand in the market. Big investors and financial institutions buy and sell at specific price levels, creating supply and demand zones. By analyzing these zones, we can see where the market is headed. Technical Analysis helps us spot these crucial price areas, allowing us to strategize our market approach accordingly.
Basis of Technical Analysis:
Price embodies everything
The price of a stock or currency considers all factors, including supply and demand.
2. Market trends
Prices follow short-term and long-term trends rather than moving randomly.
3. History repeats
The pace of price changes correlates with traders' emotions, primarily driven by greed and fear. These emotions lead to similar reactions, forming recurring price patterns over time.
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How do we apply Technical Analysis to trade?
The most crucial aspect of trading is understanding the short-term and long-term trends. Just as it's unwise to walk against an upward escalator, it's smarter to trade in line with the prevailing market trend. Once we identify the trend, we determine the optimal entry price. Then, we set a stop-loss to limit potential losses if the trade moves against us.
Finally, we establish a profit target to exit the trade if it goes as expected. Ideally, our profit target should be at least twice our stop-loss. In essence, Technical Analysis helps us analyze price movements, identify trends, set entry and exit points, and make informed trading decisions.
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