InvestorQ : What are some of the key features of technical analysis?
manisha Kolvenkar made post

What are some of the key features of technical analysis?

Mahima Roy answered.
3 years ago

Technical analysis of stocks and indices has some unique features about them. Here is what you need to know about technicals.

Technical analysis believes that stock prices move at random and hence there is no point in spending time trying to look at the valuation of the company. Since markets are random, technical analysis entirely focuses on identifying past patterns in the market.

It is based on the premise that since market is random by nature, past patterns will repeat in the future too. Hence the best thing is to identify and understand these patterns and extrapolate it to the future. That is the basis of technical analysis.

Technical analysis, contrary to popular belief, can be used in the short term and also in the very long term. In fact, the Dow Theory uses charts to very effectively and successfully identify patterns and predict markets over a 30-40 year period.

Remember that, technical analysis uses popular indicators like oscillators, Moving Average Convergence Divergence, Supports & Resistances, and Bollinger Bands etc. Over a period of time, this has emerged as a separate discipline of study.

Technicals are popularly used by short term traders as it helps them identify where to put stop loss, where to book profits, when to be convinced about a turnaround in a stock, how to trade momentum etc. From a trading perspective, technical analysis is an effective decision support tool.

Technical analysts are chartists since they extensively rely on chart patterns to take their trade decisions. Technical analysts follow a 4-step process viz. Identifying patterns, extrapolating patterns, separating the pattern from the noise and taking key trading decisions based on these charts.