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Trading With Technical Analysis

There are so many methods of trading in stock market that we can create a university course for this. Various people have various ways of analysing the market. Some prefer gut feeling, the most basic of Analysis technique available to human. Some are even said to use astrology to predict markets. Some are experts in using news and sentiments while some use financial data.

The basis of foundation behind the use of Technical Analysis is the psychology behind it. Since we already know that the price of securities is dependent on the demand and supply principle. If there is a good news, there will be lot of buying interest among people and there will be less people who will be interested in selling the shares. So the seller has an upper edge and asks the buyer to pay a higher price. So the interested buyer pays a higher price. Similarly a bad news will lead to a lot of selling pressure among people and there will be less people interested in buying. So the buyer will ask the sellers to quote a lower price in case. So the price moves lower.

We need Technical analysis because we cannot track all the new that comes into the market. But since we know that every news is discounted into the stock price. So all we need to understand is the direction of price trend and take trades accordingly, which is much easier than following each and every news.

But the most popular tool or method of analysis stock price movements has been technical analysis, which was introduced by the Japanese to the world and made famous by Americans. Technical analysis as a study was used by ancient Japanese rice traders to predict the price movement of rice in trading season. After the Second World War, after Japanese became friends with Americans, they introduced technical analysis as a way to study stock price movements.

The theory of modern technical analysis is credited to one person Charles Dow, who as a financial journalist introduced his famous Dow Theory which still stands as a foundation of all modern technical analysis tools.

Introducing the most widely used tools available for trading are support and resistance and trend line. Support and resistance tell us somewhat predetermined levels of the price of a security at which it is thought that the price will tend to stop and reverse.

The third most widely used tool is indicators which represent a statistical approach. By looking at momentum, trend, volatility, they provide a secondary measure to actual price movements and help traders confirm the quality of patterns made in the charts.



This post first appeared on Wealth Note Investments, Share Market Academy, please read the originial post: here

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Trading With Technical Analysis

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