Technical Analysis – Why is it important for Trading?

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In today’s world, data plays a very important role in our lives right from business Analytics to forecasting weather.

Similarly in the stock market with the help of data, we try to predict the probability that similar things will repeat in the future like telling the overbought and oversold zones for stocks, expected holding period to expected reward.

But, the question is: 

  1. How they get to know that stocks are over brought or oversold?
  2. How they find opportunities in the market based on market participants?
  3. What is the holding period and expected reward.

The answer to the above questions is Technical Analysis.

So, Let’s understand the Technical analysis in detail with different analogies.

What is Technical Analysis?

Let’s take the analogy of finding the best Biryani in Pune.

There are two ways to do this Task:

1st Method : Go daily to each restaurant and try out biryani and then find out which one is best.

2nd Method : Visit Zomato or Swiggy website and sort out the best review restaurant for biryani for people and try that out.

Let me explain both the methods

1st Method: In the first method, we have to give so much time and effort i.e go to each restaurant and try out to find the best biryani in Pune but the result will be so accurate.

2nd Method: When you find out the review given by the people and try it out then the time to analyze is minimum and you get the best biryani in the house but there will always be some outlier [ peoples review may be wrong ].

So what do you think, which method from above is relatable for Technical analysis?

The second way which was carried out is similar to Technical analysis as technical analysis is also done by us in the same way we are trying to predict the view point of market participants and take a trade.

There should be always pre-defined expectations if you are using technical analysis :

  1. Always take the trade on short-term views.
  2. Do not expect huge returns.
  3. Always consider the risk before initiating if the trade goes wrong, cut losses, and find another opportunity.

The technical analysis you can use on any assets like stocks, cryptocurrency, communities, etc as long as you have historical time series data [ Time series data in technical analysis context in price variables information i.e open, high, low, close, volume, etc ]

So, there are several ways to Technical analysis like:

  1. Analysis of chats.
  2. visualizing price moments.
  3. understanding mass psychology.

We will learn all of this step-by-step process how this is done. Stay Tuned!!!!!

Bonus Tip : “Biryani by Kilo”, you should definitely try if you’re in Pune.

Happy learning 🙂

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Tushar Wasake

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