Introduction:
Technical research is a common term associated with stock market investment. However, have you ever wondered what it means and its importance in trading and investing? Let’s dive deep to understand it.
What is technical research?
Technical research is a method investors and traders use to analyse the past movements of stock prices and forecast future price movements based on patterns and trends. Unlike fundamental analysis, which focuses on a company’s financial health and performance, technical research relies on charts and statistical data.
How does technical research work?
Technical research starts with studying stock price charts. These charts display the historical prices of a stock over a certain period, usually ranging from minutes to years. By examining these charts, investors look for patterns and trends indicating potential future price movements.
Main components of technical research
The main components of technical research are as follows:
Price charts are at the core of technical research. These are graphical representations of a stock’s historical price movements over time. These charts visually depict how prices have behaved in the past. This lets you identify patterns and trends, offering insights into future price movements. The most common price charts are bar charts, candlestick charts, etc.
Indicators comprise mathematical calculations applied to price and volume data to provide extra insights into market dynamics. Popular indicators include moving averages and oscillators. While the former smooths out price fluctuations to show underlying trends, the latter measures the speed and change of price movements.
Technical research involves scrutinising price charts in search of specific patterns, which may signal potential shifts in market sentiment. These patterns can include simple formations such as trendlines and channels to more complex patterns like head and shoulders, triangles, and flags. Recognising them can help you anticipate future price movements and make informed trading decisions.
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Support and resistance levels
Technical research involves paying close attention to support and resistance levels. These show price levels where buying and selling pressure historically converge. Support levels act as price floors, preventing further declines. On the other hand, resistance levels act as price ceilings, capping further advances. These levels can serve as crucial reference points for setting entry and exit points.
Volume, or the number of shares traded over a given period, is another essential component of technical research. Changes in trading volume can provide valuable information about the strength and sustainability of a price trend. For instance, a significant increase in volume accompanying a price rally may indicate a strong buying interest.
Identifying the prevailing trend is a crucial aspect of technical research. Trends can be classified as uptrends, downtrends, or sideways trends. By identifying the trend's direction and strength, you can align your trading strategies with the broader market sentiment. This significantly increases the probability of successful trades.
Importance of technical research
Technical research plays a vital role in the stock market. Its importance includes:
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Helps identify market trends
Technical analysis helps you identify trends in stock prices and find out if they are bullish (upward), (downward), or range-bound (sideways). Recognising trends allows you to align your strategies with the prevailing market sentiment, increasing your chances of success.
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Aids in predicting market movements​​​​​​​
By analysing historical price data and identifying patterns and formations on price charts, technical research can help you predict future price movements. While predictions may not be foolproof, they offer valuable insights into potential price targets and support and resistance levels.
Technical research aids in risk management by providing tools to set stop-loss orders and manage your position effectively. You can protect yourself from losses by placing stop-loss orders depending on key support and resistance levels or technical indicators.
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Understand market psychology
Technical research involves studying investor behaviour and market psychology reflected in price movements and trading volumes. By interpreting these signals, you can gain insights into market sentiment and anticipate potential market reversals or shifts in momentum.
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Compliments with fundamental analysis
While fundamental analysis focuses on a company’s financial health and intrinsic value, technical analysis further complements it by providing insights into market sentiment and price trends. Adopting both of them offers you a more comprehensive view of markets.
In conclusion​​​​​​​
With technical research, you can navigate the complexities of the market better. It helps you make well-informed decisions and boost your chances of success and wealth creation in the long run. You can open a free Motilal Oswal Demat account and seamlessly start investing in the stock markets.
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