TECHNICAL ANALYSIS IN STOCK MARKET
BHAVESH GUPTA
K.L.P, REWARI
[email protected]
INTRODUCTION
What exactly is the stock market?
The stock market refers to public markets that exist for issuing, buying, and selling stocks that
trade on a stock exchange.
The participants in stock exchange can be investors and traders who seek profits over the short
run or the long run. The investors mainly have a long-term horizon and benefit from capital
appreciation over time. Traders, however, look for quick profits by focusing on the small price
changes in equity shares which mostly last for a few minutes or the whole trading session.
Stock analysis is a method for investors and traders to make buying and selling decisions. By
studying and evaluating past and current data, investors and traders attempt to gain an edge in
the markets by making informed decisions.
So for stock analysis an investor or a trader do such type of analysis
Fundamental Analysis
Technical Analysis
Fundamental Analysis
Fundamental analysis concentrates on data from sources, including financial records, economic
reports, company assets, and market share. From such analysis an investor or a trader finds out
what is the possibility that the price of a share will increase or decrease in future. For e.g. The
financial record of the company shows that the company has made double profits this year or
the company has got a new deal for which government or some big institute is going to invest
its fund in such company so what does this indicates it means in the upcoming days the
company will perform more better as well as the company is going to make more profits
therefore the price of its shares will also increase. Therefore such type of analysis helps an
investor to invest his money in a stock.
Technical Analysis
The second method of stock analysis is technical analysis. Technical analysis focuses on the
study of past and present price action to predict the probability of future price movements.
{Price action is the movement of a security’s price plotted over time. Price action is the basis
for all technical analysis of a stock, commodity or other asset chart.}
Technical analysts analyze the financial market as a whole and are primarily concerned with
price and volume, as well as the demand and supply factors that move the market.
Volume is the total no of shares being bought and sold or traded on stock exchange.
Charts are a key tool for technical analysts as they show a graphical illustration of a
stock’s trend within a stated time period. For example, using a chart, a technical analyst marks
certain areas as a support or resistance level.
The support levels are marked as the region from which the price of a stock stop going down
and it comes back up again from that level. It is also known as demand zone as from that place
the price of a stock start coming up.
And the resistance region is that area from which the price of a stock stops going up and it
comes back down from that region. It is also known as the supply zone because of more supply
the stock price reduces.
So now how do these support or resistance zones help a trader in trading or investing? Answer
for this question is that , “a break below the support level would indicate a bearish trend to the
stock analyst, while a break above the resistance level would take on a bullish outlook for that
particular stock”.
Both fundamental and technical analysis can be done independently or together. Some analysts
use both methods of analysis, while others stick to one. Either way, using stock analysis an
investor can invest his funds with proper understanding and creating the best investment
strategy for his or her portfolio.
Some of the most commonly used technical indicators by traders or
investors
Technical indicator is mathematical calculation based on historic price volume or open interest
information which helps an investor or a trader in forecasting the future financial market
direction. Some of the technical indicators are as follows:-
MA or ‘moving average’
MA is an indicator used to identify the direction of a current price trend. The MA indicator
combines price points of a financial instrument over a specified time frame and divides it by the
number of data points to present a single trend line.
Moving average convergence divergence (MACD)
MACD is an indicator that detects changes in momentum by comparing two moving averages. It
can help traders identify possible buy and sell opportunities around support and resistance levels.
‘Convergence’ means that two moving averages are coming together, while ‘divergence’ means
that they’re moving away from each other. If moving averages are converging, it means
momentum is decreasing, whereas if the moving averages are diverging, momentum is
increasing.
Bollinger bands
A Bollinger band is an indicator that provides a range within which the price of an asset typically
trades. The width of the band increases and decreases to reflect recent volatility. The closer the
bands are to each other – or the ‘narrower’ they are – the lower the perceived volatility of the
financial instrument. The wider the bands, the higher the perceived volatility.
Bollinger bands are useful for recognizing when an asset is trading outside of its usual levels,
and are used mostly as a method to predict long-term price movements. When a price continually
moves outside the upper parameters of the band, it could be overbought, and when it moves
below the lower band, it could be oversold.
Relative strength index (RSI)
RSI is mostly used to help traders identify momentum, market conditions and warning signals
for dangerous price movements. RSI is expressed as a figure between 0 and 100. An asset around
the 70 level is often considered overbought, while an asset at or near 30 is often considered
oversold.
An overbought signal suggests that short-term gains may be reaching a point of maturity and
assets may be in for a price correction. In contrast, an oversold signal could mean that short-term
declines are reaching maturity and assets may be in for a rally.
Fibonacci retracement
Fibonacci retracement is an indicator that can pinpoint the degree to which a market will move
against its current trend. A retracement is when the market experiences a temporary dip – it is
also known as a pullback.
Traders who think the market is about to make a move often use Fibonacci retracement to
confirm this. This is because it helps to identify possible levels of support and resistance, which
could indicate an upward or downward trend. Because traders can identify levels of support and
resistance with this indicator, it can help them decide where to apply stops and limits, or when to
open and close their positions.
REFERENCES AND BIBLIOGRAPHY
Anson, M. (2007) ‘A guide to stock market’ Journal of finance, 15(8), 1255-1290
Brown, N. (2011) ‘Exchange rate exposure hedging and the use of foreign currency derivatives.’
Journal of international money and finance, 20(4), 300-374
Kim, D. (2017) ‘Finance and growth’ Journal of finance, 17(3), 1270-1319
Rubani, M. (2017) ‘Market wizards’ International journal of finance, 26(2), 104-176
WEBSITES
www.wikipedia.org
www.valuenotes.com
www.indianfinance.com
www.stockhelper.com
www.investopedia.com
www.tradingview.com
www.moneycontrol.in