Technical analysis is a way of understanding price charts of financial securities in order to make buying or selling decisions. Helps you in reading price charts & make buying/ selling decisions.
Instead of depending on just fundamental facts/data of any trading instrument, you can make trading decisions based on real time price of the underlying asset.
Technical analysis gives you more understanding of current price levels of underlying assets. We use price charts to understanding whether the current price levels of underlying asset is overpriced or underpriced.
Price charts in technical analysis is drawn using the past price data and current real time price levels. Trading software platforms, has the capability of displaying you different types of price charts. You can use these price charts to predict future price levels & make your own trading decisions. Let’s look at few types of price charts below.
Candlestick charts are one of the widely used chart types by traders across the world. It simply displays past price and real time price fluctuations of financial assets in the form of candle as seen in below image.
Price in a bar chart is displayed in the form of vertical bars by taking open, close, high & low data for a particular time frame. Below image displays bar charts in 15 min time frame.
Renko charts is most known and used by traders for its simplicity & ability to filter out noise of market. Renko chart takes price data and displays it in the form of bricks.
Each brick inside a renko chart can be made of a pre determined price change. For example, let’s say that you decide for every price change of $ 5 or Rs 5 for any given financial asset a renko brick should be formed. Then every time when the current market price (CMP) of financial asset change by $5 or Rs 5, renko chart will form a new brick.
If the price changes above the CMP, renko chart will form a green color brick. If the price changes below the CMP, renko chart will form a red color brick. Renko chart will not consider the unsustainable high and low for the time frame set by you on the charts.
Below is the example of renko charts in 15 min time frame.
Heiken Ashi charts looks similar to candlestick charts but differ in wick (also called as tail or shadow) presentation. This difference in representation is because of the price data inputs it considers to display in form of charts.
Heiken Ashi charts combines prior normal candlestick & heiken ashi candle data and process it through heiken ashi calculation formula to display a new heiken ashi candle. Check the below chart displaying heiken ashi candle.
Now take a look at another price chart example displaying difference between a ordinary candlestick chart & heiken ashi chart.
Line charts are simplest form of price charts in technical analysis. Line charts takes just one price source from open, high, low or close in a given time frame. Below price chart image example displays a line chart in 15 min time frame.
Mostly line charts uses closing price, but you can change it inside your trading terminal(if you have the modification option) and choose a different price data like high, open or low.
There are plenty of technical analysis strategies in the trading world. But to get success with trading using technical analysis, you need to stick to one or two good technical analysis strategy & keep tweaking it for better accuracy & risk reward ratio.
Technical analysis takes past & real time price into consideration, whereas fundamental analysis relies on theoretical data like financial data, economic factors, sector conditions etc.
I personally rely more on technical analysis for entry and exits. But I definitely don’t neglect fundamental analysis when I am about to take a new trading position.
Learn everything about technical analysis as much as you can. It will be beneficial for you & give you diversification in understanding price fluctuations in stock markets.
You can use technical analysis to predict future price levels and make your own trading decisions. So choose different topics from below posts and start learning technical analysis one by one.
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