Introduction To Technical Analysis

For the benefit of newbies like me I will post a short course on Introduction to technical analysis in this thread. The material that willbe posted here willbe sourced from the great library called Internet and in no way i suggest that its my own.

I am sure some newbies like me would like to learn quickly and start trading .

In order to start trading, we need the follwoing essentials:

Knowledge of TA(at least a basic knowledge) as there is no end to the acquiring of knowledge

Developing a trading system -
money management-which specifies entry, exit levels and position sizing
Discipline- to adhere to rules of the trading system
Fundamentals- a basic knowledge of P/E, PEG,Book value, market capitalisation,interest rates, institutional investments, and so on.

The first topic will be what is technical analysis.
this will be posted soon.

Great Tanewbie,

I will be waiting eagerly for your inputs.

Regards
Chachi

Technical analysis is research of market dynamics that is done mainly with the help of charts and with the purpose of forecasting future price development. Technical analysis comprises several approaches to the study of price movement which are interconnected in the framework of one harmonious theory. This type of analysis studies the price movement on the market by means of analyzing three market factors: price, volumes, and, in case of study of futures contracts’ market, of an open interest (number of open positions). Of these three factors the primary one for technical analysis is the prices, while the alterations in other factors are studies mainly in order to confirm the correctness of the identified price trend. This technical theory, just like any theory, has its core postulates.

Technical analysts base their research on the following three axioms:

Market movement considers everythingThis is the most important postulate of technical analysis. It is crucial to understand it in order to grasp rightly the procedures of analysis. The gist of it is that any factor that influences the price of securities, whether economic, political, or psychological, has already been taken into account and reflected in the price chart. In other words, every price change is accompanied by a change in external factors. The main inference of this premise is the necessity to follow closely the price movements and analyze them. By means of analyzing price charts and multiple other indicators, a technical analyst comes to the point that the market itself shows to her/him the trend it will most likely follow.
This premise is in conflict with fundamental analysis where the attention is primarily paid to the study of factors, and later on, after the analysis of the factors, to conclusions as to the market trends are made. Thus, if the demand is higher than the supply, a fundamental analyst will come to the conclusion that the price will grow. Technical analyst, however, makes her/his conclusions in the opposite sequence: since the price has grown, it means the demand is higher than the supply.

The prices move with the trendThis assumption is the basis for all methods of technical analysis, as a market that moves in accordance with trends can be analyzed, unlike a chaotic market. The postulate that the price movement is a result of a trend has two effects. The first one implies that the current trend will most likely continue and will not reverse itself, thus, excluding disorderly chaotic movement of the market. The second one implies that the current trend will go on until the opposite trend sets in.

The history repeats itselfTechnical analysis and studies of market dynamics are closely related to the studies of human psychology. Thus, the graphical price models identified and classified within the last hundred years depict core characteristics of the psychological state of the market. First of all, they show the moods currently prevailing in the market, whether bullish or bearish. Since these models worked in the past, we have reasons to suppose that they will work in the future, for they are based on human psychology which remains almost unchaged over years. We can reword the last postulate — the story repeats itself — in a slightly different way: the key to understanding the future lies in the studies of the past.

The next topic is Time frames. The importance of time frames cannot be underestimated.

Timeframes

Regardless of the "timeframes" of the data in your charts (i.e., hourly, daily, weekly, monthly, etc.), the basic principles of technical analysis endure. Opportunities exist in any time frame. But customized settings of the technical analysis tools are needed for each time period.

On the weekly chart, the scale interval on the time axis is one week. On the monthly chart, correspondingly, every bar shows price behavior for one complete month. It is obvious that in order to cover a longer period of time and to be able to analyze long-term trends, one has to compress the price behavior. A weekly chart, for example, can cover a period of five years and more, the monthly chart can cover twenty years or more. This is how the analyst manages to see far ahead of her-/himself and that is how s/he can assess the market in terms of the long-term opportunities, which are really valuable while conducting the technical analysis.

The order of studying price chart is very important for deep analysis. It is wise to start by analyzing long-term charts and then move slowly to short-term charts. There is less "noise" on the long periods, that is why graphic models, basic trend lines and different levels of support or resistance are seen more clearly. This accounts for the type of work with data time periods. If we start studying short-term market, later on, as the volume of analyzed data expands, we will have to reconsider the conclusions several times at least. In the long run, short-term results may even change completely after long-term charts have been studied. If we start analyzing longer periods first, we can establish where the market is in terms of a long-term perspective. After that, we could then turn to chart studies which cover shorter periods of time. That is how an analyst goes from "macro" to "micro" analysis. At the final stage of the analysis, we determine the point of "entry into the market", i.e., the point of opening a position. The shorter the last analysis stage is, the more precisely one can determine this entrance point.

TRADING SYSTEMSA trading system (TS) is a set of instructions which advise opening or closing trading positions based on the results of technical analysis. A trading system allows to exclude randomness in the trading process. Strict adherence to the system permits to rule out the emotional factor in the trade. For this reason, one must follow all recommendations of the system strictly even if for all that a potentially profitable position will not be opened.

The first thing you need to do when creating a trading system is to select time periods, or working timeframes, you will work with. A lot of restrictions in this respect come from the starting deposit and principles of capital management. Long-term periods are accompanied by lesser "financial noise" than shorter periods. Technical analysis performed for long term periods is more accurate and provides a lesser number of false incitements. Long-term periods are preferable in terms of successful working, but, however, they require a larger starting deposit. Shorter timeframes are characterized by greater noise, but, hence, the technical analysis is less accurate and gives out more false signals.

In cases of a modest starting deposit, it is not recommended to direct one’s attention in trading to long timeframes, it is better to try medium and short ones first. On longer time periods price fluctuations are not as evident, but, in fact, these fluctuations may be significant enough so as to "eat up" the entire starting deposit. Thus, the first restriction for the trading system is the starting deposit that determines the choice of the working timeframe. Please bear in mind that the settings of analytical instruments for each of the periods are to be selected individually. Besides, if performing analysis for short timeframes, the requirements to the analytical instruments have to be as exacting as possible.

The second task of the trading system is to define the entry point with the help of technical analysis. In any TS, irrespective of analytical instruments, the analysis must be started from a large timeframe and pass gradually to shorter ones. The first thing to be defined is the current market conditions as a whole.

For instance, if our trade is guided by the trend, we first determine the global trend. Even if a signal to buy comes at the time of a downward trend, a position should not be opened in such a trading system.

After that, the market conditions for periods of lesser order are analyzed. Eventually, the working timeframe is analyzed. If there appears a signal confirmed on long timeframes, one can open position immediately. However, to define the optimal entry point one can perform additional analysis on shorter timeframes.

The most important task of TS’s is to determine the exit point. Any system must provide not only the signal to open a position, but estimated levels of profit, as well. Order Take Profit should be placed next to this level. It is also necessary to identify the level of stop loss for the case when the market starts to move in an opposite direction. Place the Stop Loss order at this level. In other words, the TS must define exactly, up till which level the position should be held open in order to receive maximal profit, and define mechanisms for loss stopping in case of an unfavorable development of the market.

Vish,

Great thread. I am sure we will all benefit form this wonderful thread. Thanks for starting it.

By the way it is time you changed your nickname. You are anything but a newbie

warm regards

Karthik

Excellent keep up the good work, I love reading such articles, just gobble them up yummy

Great going,Tanewbie...........and as always,looking fwd to more!

Saint

Seconded on all the words.

Best Regards,
--Ashish

Great Going , I Will Always Get Benefited By Such A Thread