How you can apply "Technical Analysis" and make your investment fruit full...

Technical Analysis is a very interesting way to predict the future movement of any investment vehicle, while I'll focus mostly on security analysis but you can apply this knowledge on other investment vehicles e.g. Bonds, FX Currencies, Commodities or simply when there is active market available for any investment. More precisely "Active Market" meaning that where buying and selling activities occur on regular basis. Most of the times many people are very confuse about which scrip is right for them and how they pick that scrip? Fundamental analysis is not for everyone, because it takes a huge time to analyze any security, for fundamental analysis one should have strong background of finance which transforms that knowledge into fruit full outcome. Few scrip are apparently very attractive for investor when they start rising without any fundamental growth story just on the basis of rumor spread in the market or suddenly change the investor sentiments. I have seen many people those following others without any knowledge either fundamental or technical, that’s very dangerous for their investment strategy. My objective for writing this article to convey technical knowledge specially to “Day Traders” because it’s very important to know the technical position of scrip when to enter and exit, so they can make a handsome return on their investment.

"Greed is the root of all evils"

I’ll explain the basic indicators of technical analysis which are required to just have a look and confirm, what is the position of stock at that time? Once you go through those indicators so you will be very confident that now you are on right path and this is the time to make a handsome return from your investment.

Technical Indicators

Support and Resistance Level

Support and Resistance level is very important point to know for an investor because it's a trigger point where most probably the existing trend reverse or continue. As per Image, resistance points is that when buyers are exhausted and sellers come into action and start selling similarly on the other hand support at point where all sellers left empty hands and no option except start buying again. Two terms usually use at this time "Breakout & Breakdown" when scrip close above from it's resistance level that's called breakout and when scrip close below it's support level that's simply called break down, volumes are also playing vital role in at this point these breaks with a huge volume would indicate that now investors are aggressive or conservative for the scrip. In support and resistance level people usually calculate the Support 1, 2 and resistance 1, 2 to know if any script break it's first support and what will be the second support point? which can be used as a stop loss. Let me tell you how you can calculate these points by using the Open (O), High (H), Low (L) & Close (C) prices. First of all you need to calculate the Pivot (P) point

P = (O+H+L+C)/4.

Support & Resistance 1

S1 = P-(H-P) or 2xP-H

R1 = P+(P-L) or 2xP-L

Support & Resistance 2

S2 = P-(H-L)

R2 = P+(H-L)

these above formulas will help you a lot in calculation of Support and Resistance points and identify your stop loss at S2 but be care full at time placing your stop loss, don't try to place your stop loss exactly on support level because may be scrip bounce back from it's support level therefore that's very important. This pivot point also tells if next day scrip sustain it's level above from pivot point so generally sentiments are bullish for that scrip or vise versa.

Strategy for support and resistance level: buy at support and sell on resistance in a simple way but keep an eye on these trigger points because if it's break these level so that will start another journey.

Relative Strength Index (RSI)

RSI is very interesting indicator in technical analysis that you can use in your decision making while analyzing any scrip by just have a look at the chart. Let me tell you how you will interpret this chart. Bottom of the image there are few lines which are telling the position of the scrip. RSI simply bounded in between 0 - 100 level, but most crucial levels are 30 and 70 and the blue line is RSI line which is calculated on the basis of 14 days average gains and losses. If blue line touches the at 30 level it's indicating the oversold position which means many investor already sold particular scrip just like abnormal selling pressure due to some rumor or any thing bad happened with that scrip, similarly if this blue line touches at level 70 so it's start indicating that now this scrip become overbought now further buying may be restricted and investors would start profit taking from this point. Usually it's not a rule of thumb that if any scrip crosses this point so must go up or down, It depends on the situation along with the news which is prevailing in the market about scrip. Lets say scrip chart is indicating that RSI line crossed significantly above from 70 level but still going up that reflects the investors are more bullish for this scrip due to any reason for example fundamental growth story, Great earning announcement than expectations and etc.

Strategy for RSI: Buy at near level 30 and sell at near level 70. If you can find any scrip which is already in a oversold position then just wait for the little up move and keep watching on the upcoming news and announcement of that scrip.

Moving Average Convergence and Divergence (MACD)

Now come to the another interesting indicator which give you very clear and quick help in security analysis. Just look at the chart there are two lines appearing Blue and Red, Blue line is called MACD line and Red line is signal line, here no need to go in depth how these lines being made, further you can see the bars as well which are histogram it's showing the strength of prevailing trend either upward or downward. when there is divergence between MACD and Signal line so bars will be bigger and and when there is convergence between MACD and Signal line so bars will be smaller.Let me tell you interpretation of these two lines when MACD line is crosses above the Signal line so that moment It would generate a buy signal and when MACD lines crosses below the Signal line so then it would generate a sell signal, sounds good, Is that so simple? and the answer is Yes, It is very simple because these charts automatically updated and you don't need to put any efforts to update these charts, just look at the chart and make a quick decision.

Strategy for MACD: When MACD line crosses above signal line time to "Buy" and when MACD line crosses below signal line at that time "Sell".

Bollinger Bands

Bollinger bands are reflecting the deviation (2pc above & 2pc down) in the price from 20-day simple moving average (SMA) price. very simple to understand this chart wider the band tells you more riskier the stock due to high volatility (Risk) and narrower band means low volatility.

Strategy for Bollinger Bands: When scrip price touches the upper band then "Sell" and when It touches the lower band then "Buy". This is very simple strategy and very help full.

Simple Moving Averages (SMA)

Simple moving averages (SMA) are another way of analyzing any scrip, Time frame is most important in this indicator because using this indicator means now dealing with multiple price lines at different time frame. Lets say I am using the simple moving averages 10-day, 20-day and 30-day so if there is bullish trend is prevailing in scrip so 10-day SMA must be higher than 20-day and 20-day SMA must be higher than 30-day SMA. If 20-day SMA is above than 10-day SMA so this is the sign to exit from your current position, because It seems bearish for scrip upcoming move.

These all above indicators you can use on a daily basis and make your investment fruit full for you and earn money without depending on others shoulder that when someone guide you then you invest. There are so many other indicators which are using by technical analyst to make their forecast/ Prediction more closely to the actual performance. You can apply this knowledge either on market or any particular scrip in which you want to invest. But keep in mind I wrote this article with the view of day traders because when you are going to invest for long term then you have to focus on fundamental of the company and check the long term charts to see the performance historically.

"I Believe that stock selection must be based on fundamentals analysis while trading based on technical analysis"

In Investment, I would suggest you to make targets for your investment instead speculating by holding your position for little bit up from current level, Don't put yourself in such a situation always achieve your target and exit from your position, If you still want to buy then analyze again Fundamentally + Technically otherwise there are so many scrip in which you can investment. Always try to make portfolio instead investing in any single scrip, because by making portfolio you can significantly reduce your risk factor.

"Trend is your Friend"

Sites where you can access the technical charts

scstrade

Investing.com

If you like this article then comment below so I'll write another article on Charts patterns and more specifically Candlestick Chart.