Technical Analysis Framework Every Trader Must Learn

Hi everyone! In this first video of technical explainer series, and in the next few episodes, we will learn what technical analysis is, how it can be used in trading, and how we apply it in our own trading approach. By the end of this series, you should have a clear understanding of how to use technical analysis for its intended purpose.

The primary purpose of technical analysis is to forecast future price movement based on past performance, historical charts and previous price behaviour of a financial asset. This asset could be anything: an index such as Nifty, or a stock such as XYZ. The core belief in technical analysis is that price behaviour tends to repeat itself. Patterns that have appeared in the past are likely to reappear in the future. If we look at the definition, technical analysis is the study of past prices and data to predict the future prices of a particular asset. Now, how is technical analysis different from fundamental analysis?

Fundamental analysis focuses on factors such as company performance, the economic environment, sector-level demand and how well the company manages its finances. These factors eventually influence long-term growth in a stock. Technical analysis, on the other hand, assumes that all known information is already reflected in the current price. For example, if a company called XYZ has strong business prospects, its financial strength is already factored into its current price. If there is negative news, the price will reflect that as well. Technical analysis reacts to what is happening in the market right now, which makes it more suitable for short-term decision-making. Fundamental analysis is better suited for long-term investment decisions.

Let us move to the key components of technical analysis. We will study each of these in detail in the upcoming chapters. The core components are:

1. Price

Price is the most important element. Every analysis begins with price movement on a chart.

2. Volume

Volume indicates market participation. For example, if a stock suddenly sees a sharp rise in volume, it usually means many people are interested in it. This might not appear in fundamental analysis immediately, but technical analysis captures this interest through volume indicators.

3. Open Interest (for derivatives)

Open interest helps us understand how many outstanding contracts exist in futures and options. It shows whether positions are being created or closed.

4. Strength or Relative Strength

Strength refers to the momentum of a stock. If momentum is high, the price trend is more likely to continue for a longer duration. If momentum is low, trends may slow down or reverse in the short term.

5. Chart Patterns

Chart patterns are combinations of price movements that form recognisable shapes on the chart. These patterns help identify possible future price directions. We will cover these in detail in the next chapter.

6. Candlestick Analysis

Candlesticks visually represent price movement within a specific time frame. When there is strong interest in a stock, candle shapes and formations change accordingly.

Candlestick analysis has two major components:

· Support and resistance

· Trend analysis

Certain candle patterns indicate positive momentum, often referred to as bullish signals. Others indicate negative momentum, signalling a potential downtrend.

These are the basic building blocks of technical analysis. The upcoming chapters will explain each concept in a structured and systematic manner.

Investments in securities markets are subject to market risks. Read all related documents carefully before investing.