Why should I know technical analysis?

One of the questions I often hear is, “Will your technical analysis technique work on our (Indian) markets?” The answer is a resounding yes and is obvious if you understand what trading is all about.

Most people incorrectly assume that trading is all about understanding the fundamentals of the market or knowing the balance sheet of a company. It doesn’t have as much to do with that as it does with understanding people. People’s perceptions or expectations of a company or even the entire economy are what drive prices of securities. Prices of equities, commodities, and currencies are all subject to the same laws of supply and demand as is any other product. In fact, this is why you will often see prices drop after a company meets expectations for an announcement. The demand for the shares prior to the release overwhelmed the supply. Sellers realized this and raised their prices they were asking for shares. Buyers, in a desperate attempt to own shares, will raise the amount they are willing to pay for them.

For instance, if Tata Motors sells a larger amount of cars than expected, but traders have already anticipated this, then the price will not move up as you might expect. The traders who were expecting positive sales results have already bought their shares prior to the announcement. This should have caused a rise in price for the reasons I stated above. Once the data is known by everyone and there is no surprise, some buying may come in. However, the traders who already own shares are disappointed that the price isn’t rising more or they are satisfied with their profits and begin to sell. Without increased buying pressure from interested parties, these sellers must drop their price to attract buyers to take their shares.

So you see how human emotion, basically fear and greed, will motivate traders to act in the market. This is what causes price movement. So to be successful in trading, you need to know how to read this emotion and the strength of it. That is what technical analysis does. The charts show us the actions of the traders who are involved in that security. In looking at candlesticks and technical tools, we can read the strength of the emotion of those who will move the markets. We can see when this emotion is shifting and leading market turns.

Most people get their knowledge of technical analysis from reading books on the topic or from the internet. While there is no shortage of information available, it is usually traditional technical analysis. Traditional technical analysis is flawed. The indicators and oscillators that are taught are usually delayed when they offer their buy and sell signals.

Take for instance the Stochastic Oscillator. This indicator indicates where prices are closing within a range. If you are in a bullish trend that you expect to continue, you would expect the share price to close at or near to the high of the day or the high from several days. If price closes away from that high, then the buying pressure has weakened, or selling pressure gained. Either way, it is not good for the people holding the stock long. If there is a close that occurs significantly far from the highs, it would trigger a sell signal on the oscillator.

This seems like a great way to analyze price. But if you wait for price to trigger that sell signal, you would have already seen price move away from the supply zone and would have either given up some of your profits or entered into a short much further from your optimal stop loss level. Using delayed signals from technical indicators costs you money and increases your risk.

So how should we use technical analysis then? Well Online Trading Academy’s Core Strategy is built upon reading price itself from a technical manner. Without the delays of indicators and focusing on what really matters, the Core Strategy offers traders the ability to find higher probability trading opportunities with lower risk and greater profit potential. These are the types of trades all traders should be looking for.

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