What is Technical Analysis?

Technical analysis is the study of price actions which is based on one major assumption, i.e., freely traded markets travel in trend.

The two famous methods for analysing the markets are technical analysis and the fundamental analysis.

While fundamental analysis primarily considers economic cycles, macroeconomic and microeconomic data, industry data, and stock-specific data. The field of technical analysis primarily relies on historical price data to forecast the future direction of the security under consideration.

Centuries of work and observation along with the advancement of mathematical tools and computers have now divided the technical analysis into two subbranches, i.e., subjective technical analysis and objective technical analysis.

The subjective field deals with charts, classical western price patterns, mathematical relationships such as geometric relationship- as in harmonic trading patterns, while the objective field majorly deals in studying the price history, identify functions which explains and correlates the past price behaviour to a certain extent, and backtesting those functions to test their performance on the historical data.

Despite a lot of advancement in the field, the primary goal of the field remains the same: identify the trend as early as possible, capitalise on it for as long as possible, and manage the risk along the way.

How Technical Analysts Make Money?

There are a lot of requirements to convert pure technical analysis into money, but the first and most important is to determine when a trend is beginning or ending. Then the money is eventually made by jumping on the trend as early as possible, which though may sound very simple theoretically, but could be really challenging in practice.

From a tactical standpoint, a technical analyst must decide on two things: when to enter the market and when to exit it; and choosing when to exit compose of two things, i.e., when to close a position to book profit when the trend moves in favour and when to book a loss and exit when it is moving against you.

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