To be successful in the stock market, technical analysis of stock charts is a skill that must be learnt. The success of any movie or novel is based on its premise.
1. Studying the past price movement
Technical Analysis for beginners may seem like a complicated process. However, it is not a new concept. We have been doing it in every walk of our life. Experiences are a matter of the past and the decisions we take in the present affect our future. But every decision is born out of the experience. Putting it a different way, if the future is the lock then the past is the key. Suppose I was to ask you one question: What will be the maximum temperature in the coming winter session? Take a guess! If you have answered this then you have referred earlier history of temperature in the past and that was your premise of answer. The same premises go for Technical analysis. We need to understand the history of price behaviour and extrapolate the same in the current context. One of the adages is very apt in this context…”More we know about the past…better we are prepared for the future”
2. Technical analysis is all about probabilities and not absoluteness
Thinking in terms of probability while doing technical analysis is a highly required trait in traders. How we think anchors how we trade. Adaptability to changing market scenarios is possible only when we are thinking in terms of probability. Technical analysis is not a science where there is no second thought not as an art that is completely subjective. It lies in between the extreme of science and art. Technical Analysis helps to gauge the direction of a trend whereas on another hand it is a risk management tool that also gives insight into where the trade setup is failing. Every trade has an element of risk, one can embrace risk only when analysis and trades are imbibed with probability.
3. History repeats itself
Widely known above phrase’s full version possibly, can be “History repeats itself not exactly but rhymes around”. These premises are interlinked. If the history is not repeated then there is no meaning to studying the past price behaviour. Trading technology, interface, and tools have evolved over the period of time but market psychology and reaction from the state of greed and fear tend to be very predictable.
4. Market discounts everything.
Let us understand this premise with Analogy. I believe, we all have experienced this. One person who feeds fishes in the pond, the moment he throws bread in the pond, fishes consume it in a fraction of seconds, there is no leftover. The same thing happens in the stock market. The pond represents the market, a piece of bread is like a factor that affects the market, sector, or stock and investor, and traders are the fishes in the pond. The moment any price-sensitive event occurs, all the participants of the market act on that event and there is no leftover. So, the Stock Market reacts very immediately to any event which affects it. It cannot happen, the market has acted in a leisurely way. These are key premises of Technical Analysis. In our next note, we will be talking about how to study the past price movements.