What is Technical Analysis? A Simple Guide for Beginners in Trading

If you are a beginner and want to learn trading in the stock market, then first of all, you have to learn technical analysis. Today in this article, we will talk about what is Technical Analysis in trading, how many types of technical analysis are there, and how does technical analysis works.

I will explain everything about technical analysis to you in simple language and will guide new traders step by step on what and how to learn in technical analysis. After reading this article, you will not need to read any articles or watch any videos on this topic. So let’s start…

What is Technical Analysis?

Technical analysis is a method using which we can easily analyze any chart, we can predict whether the market will go up or down. Technical analysis says that by analyzing the past and present performance of any stock chart, we can predict the future performance of that particular chart.

That is, by analyzing the past data of any chart, we can find out what will be the next move of this chart will be in the future.

Types of Technical Analysis in Trading

There are 4 types of technical analysis:

• Price Action (Most Important).
• Smart Money Concept (SMC).
• SL (StopLoss) Hunting.
• Indicator-Based Trading.

Price Action

Out of these four methods, price action is the most popular, accurate and simple. Most traders use price action. We have to learn inside price action:

• UpTrend, DownTrend, and Sideways market.
• Support and Resistance.
• Candlestick Patterns.
• Chart Patterns, etc.

We will understand price action in detail in another article.

Smart Money Concept (SMC)

Smart money concept is an updated version of price action. SMC is an advanced method. In SMC, we have to learn:

• Order Block (OB).
• Fair Value Gap (FVG).
• Break of Structure (BOS).
• Change of Character (CHoCH).
• Market Structure Shift (MSS)
• Liquidity Zone.
• Supply & Demand, etc.

We will understand SMC better in another article, we will know everything in detail.

SL Hunting

SL hunting is a part of technical analysis, but not completely because SL hunting is a psychology based method, in which we have to understand the psychology of buyers and sellers.

We have to understand where most buyers are entering and where most sellers are entering. After this, we take the trade after the stoploss of buyers and sellers is hit. We will understand SL hunting in detail in another article and will also tell you how to trade.

How Technical Analysis Works in Trading?

Basically, Technical Analysis tells us where to buy, where to sell, and where to hold. Using technical analysis, we have to find out only three things.

• Market Trend (UpTrend or DownTrend).
• Turning Point (Trend Reversal).
• Sideways Market.

Technical analysis tells us the direction of the market – uptrend or downtrend, or sideways market- and we take trades by following the trend. Apart from this, with the help of technical analysis, we can find out when the market trend will reverse, and we can earn money by doing trend reversal trades.

Types of Charts

There are four types of charts in the market:

• Line Chart.
• Bar Chart.
• Candlestick Chart (Most Popular).

Out of these, we only use candlestick charts to analyze the market. On the candlestick chart, we see red and green candles, although we can change the colors of the candles manually. Technical analysis works only on candlestick charts.

Most Popular Technical Indicators

• Moving Average/Exponential Moving Average (MA/EMA).
• Relative Strength Index (RSI).
• Fibonacci Retracement.
• Bollinger Bands (BB)
• Moving Average Convergence Divergence (MACD).

Importance of the Timeframe in Trading

The most important thing in technical analysis is timeframes. Although technical analysis works on all time frames, you have to choose the time frame according to your trading style.

If you choose the wrong time frame, you will not be able to become a profitable trader. Technical analysis will not work well for you, so you have to select the time frame carefully.

Technical Analysis vs Fundamental Analysis in Trading

Technical Analysis:

• Technical analysis involves price charts, candlestick patterns, chart patterns, and indicators.
• Technical Analysis focused on past and present performance and market data (Price, Volume).
• Tool Used: support and resistance, Trendline, RSI, EMA, BB, Fib, etc.
• Technical Analysis is used for short-term Trading (Intraday Trading, Scalping, Swing Trading).

Fundamental Analysis:

• Fundamental Analysis is used for long-term investing.
• Fundamental Analysis based on the company’s financial health, earnings, economy, industry Outlook, etc.
• Tools Used: Financial reports, news, balance sheets, P/E ratios, etc.

Advantages and Disadvantages of Technical Analysis

Disadvantages:

• Not always work: Technical analysis does not work every time, because technical analysis gives us only probability, not certainty. The signal given by technical analysis is not 100% confirmed.
• Wrong signal: All the technical indicators give very late entries, and sometimes give wrong and false signals, causing traders to suffer losses.
• High risk is involved in this.

Advantages:

• Technical Analysis helps in making quick decisions. By looking at the chart, one can quickly know when to take a trade.
• Easy to identify trend: With the help of technical analysis, one can predict in advance whether the market will go up or down.
• Works on any market: stock, crypto, or forex, technical analysis works in every market, even if you do options trading, this technical analysis works.
• As the risk is high, the reward is also high. With the help of risk management, we can reduce the risk and increase the reward.

Tips for Beginners in Stock Market

If you are new to the stock market, then you will have to learn price action first. You will have to understand price action well, and after that, you can learn the smart money concept, and after that, you can learn SL hunting.

If you are a beginner trader, then you do not have to directly learn the smart money concept or SL hunting first; you have to understand price action, because price action is the root of all these.

We will understand price action in step-by-step detail in the next article.

Conclusion

With the help of technical analysis, you can catch the short-term move in the market. Technical analysis helps us to find the best entry, exit. In technical analysis, one has to learn price action, smart money concept, and SL hunting. Out of these, you have to learn price action first, then SMC, and then SL hunting. Technical analysis helps us to make quick buy, sell decisions, apart from this, it sometimes gives wrong signals.

If you want to do long-term trading and investing, then you have to learn fundamental analysis along with technical analysis; this will give you better results. And if you do intraday trading or swing trading, then you only need technical analysis.

Take the right decision, stay disciplined, learn technical analysis step-by-step, and practice regularly.