INTRODUCTION TO

TECHNICAL ANALYSIS

Unit 1-Topic 1

Prof.Rugved Shivgan
 Introduction- Technical Analysis

 Technical Analysis can be defined as an art and science of forecasting future prices based on an
examination of the past price movements.

 Technical analysis is not astrology for predicting prices. Technical analysis is based on analyzing
current demand-supply of commodities, stocks, indices, futures or any tradable instrument.

 Technical analysis involve putting stock information like prices, volumes and open interest on a
chart and applying various patterns and indicators to it in order to assess the future price
movements.

 The time frame in which technical analysis is applied may range from intraday (1-minute, 5-minutes,
10-minutes, 15-minutes, 30-minutes or hourly), daily, weekly or monthly price data to many years.

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Prof.Rugved Shivgan
 Technical Analysis: The basic assumptions

The field of technical analysis is based on three assumptions:

1. The market discounts everything.

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 1. The market discounts everything

 Technical analysis is criticized for considering only prices and ignoring the
fundamental analysis of the company, economy etc.

 Technical analysis assumes that, at any given time, a stock's price reflects
everything that has or could affect the company - including fundamental
factors.

 The market is driven by mass psychology and pulses with the flow of human
emotions. Emotions may respond rapidly to extreme events, but normally
change gradually over time.

 It is believed that the company's fundamentals, along with broader

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 2. Price moves in trends

 “Trade with the trend” is the basic logic behind technical analysis.

 Once a trend has been established, the future price movement is more likely
to be in the same direction as the trend than to be against it.

 Technical analysts frame strategies based on this assumption only.

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 3. History tends to repeat itself

 The repetitive nature of price movements is attributed to market psychology;

 Technical analysis uses chart patterns to analyze market movements and

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 Strengths of Technical Analysis

 Not Just for stocks: Technical analysis has universal applicability. It can be applied to
any financial instrument - stocks, futures and commodities, fixed-income securities,
forex etc

 Focus on price: By focusing only on price action, technicians focus on the future. The
price pattern is considered as a leading indicator and generally leads the economy by
6 to 9 months. Even though the market is prone to sudden unexpected reactions, hints
usually develop before significant movements. You should refer to periods of
accumulation as evidence of an impending advance and periods of distribution as
evidence of an impending decline.

 Supply, demand, and price action: Technicians make use of high, low and closing prices to
analyze the price action of a stock. A good analysis can be made only when all the
above information is present Separately, these will not be able to tell much. However,
taken together, the open, high, low and close reflect forces of supply and demand.

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 Support and resistance: Charting is a technique used in analysis of support and
resistance level. These are trading range in which the prices move for an
extended period of time.When prices move out of the trading range, it signals that
either supply or demand has started to get the upper hand. If prices move above
the upper band of the trading range, then demand is winning. If prices move
below the lower band, then supply is winning.

 Pictorial price history: Charts are much easier to read than a table of numbers. With
this historical picture, it is easy to identify the following:
 Market reactions before and after important events
 Past and present volatility
 Historical volume or trading levels
 Relative strength of the stock versus the index.

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 Weaknesses of Technical Analysis

 Analyst bias: Technical analysis is subjective in nature and your personal biases can
be reflected in the analysis. It is important to be aware of these biases when
analyzing a chart. If the analyst is a perpetual bull, then a bullish bias will
overshadow the analysis. On the other hand, if the analyst is bear, then the analysis
will probably have a bearish tilt.

 Open to interpretation: Technical analysis is a combination of science and art and is

 Too late: You can criticize the technical analysis for being too late. By the time the
trend is identified, a substantial move has already taken place. After such a large
move, the reward to risk ratio is not great.

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 Always another level: Technical analysts always wait for another new level. Even after a new
trend has been identified, there is always another "important" level close at hand.

 Not all the signals work: What works for one particular stock may not work for another. A
50-day moving average may work great to identify support and resistance for Infosys, but a
70-day moving average may work better for Reliance. Even though many principles of
technical analysis are universal, each security will have its own Technical parameters.

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THANK YOU