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Technical Analysis of Stock Market in India

Technical analysis includes the study of past market data in relation to price and volume for the purpose of forecasting future price movements. Technical analysis, however, does not help in making any absolute predictions. Rather it only helps in projecting the "likely" price movements over time.

Technical analysis is applicable to futures, commodities, stocks, foreign exchange (forex), indices and any tradable instrument, the price of which is affected by supply and demand trends. Day traders and short-term investors participating in investment markets, like the stock market and the foreign exchange (forex) market make use of technical analysis. This type of analysis also proves very useful for hedgers.

Procedure for Technical Analysis

Technical analysis is based on the principle that price discounts every aspect and information in the market. Technical analysis also depends on the belief that price movements are never totally arbitrary and follow a certain trend. A technical analyst believes that it's possible to identify an ongoing trend, identify the trade based on the trend and generate profits as and when the trend unfolds. The methods that are used for technical analysis include:

1. Moving averages: This method is used to discover various support and resistance levels for short term and long term. The most widely used moving averages are the 30-day moving average (DMAs) and the 200-day moving average (DMAs).

2. Charts and patterns: Extensive charts are made depending on historical data on movements of prices. These charts help in identifying patterns and shapes, such as double bottom, double top, head and shoulders and triple bottom.

Basic Assumptions in Technical Analysis:

Technical analysis is based on following three assumptions

1. The Market discounts everything.
2. Price moves in trends.
3. History tends to repeat itself.

1. The Market Discounts Everything

   A major criticism on technical analysis is that it only considers price movements, leaving aside the fundamental factors of a company. In reality, technical analysis assumes that, at any given time, the price of a stock reflects everything that has or can affect the company - including the fundamental factors. Technical analysts are of the opinion that the company's fundamentals, along with the broader economic factors as well as market psychology, are all priced into the stock, thus removing the need to actually consider all these factors separately. This only leaves the analysis of price movements, which technical analysis views as a product of supply and demand for a particular stock in the market.

2. Price Moves in Trends

   Technical analysis believes that price movements follow certain trends. This indicates that once a trend has been established, then the future price movement is more likely to be in the same direction as this trend than to be against it.

3. History Tends To Repeat Itself

   Technical analysis also assumes an important idea that history tends to repeat itself, mainly in terms of the price movement. The repetitive nature of the price movements is attributed to the market psychology; indicating that, market participants tend to provide a steady reaction to similar market stimuli over a period of time. Technical analysis makes use of chart patterns in order to analyze market movements and understand trends. Even though many of these charts have been used for over 100 years, they are still assumed to be relevant because they illustrate patterns in price movements which often repeat themselves

Technical Analysis - Benefits

• It helps in identifying a trend, thus allowing investors to predict future trends.

• It allows investors to judge and understand the direction of the current trend; thus enabling them to gauge which is the best time to take a position in the market.

• When it is used in combination with fundamental analysis, company and industry related news, it minimizes the chances of incurring losses for an investor.

Technical Analysis - Drawbacks

• It depends greatly on a person's opinion and interpretation.

• It is more a study of probabilities than of the actual value.

• Useful only incase of short-term investments.