What is Technical Analysis?

Imagine you're driving in a new city without GPS. You notice that all the cars ahead of you are turning left. You don’t know why, but you assume they must know the best route. Trusting their behaviour, you follow along. This is exactly how Technical Analysis (TA) works. You don’t need to understand a company’s financials. Instead, you observe past stock prices and trading volumes to identify patterns and trends that guide your decision on whether to buy or sell. By understanding these patterns, you can develop a strategy for making better trades, and that's where TA becomes a powerful tool.

Now, let’s explore how TA helps you make trading decisions and the core components that shape this analysis.

Understanding Technical Analysis

At its core, Technical Analysis is a method traders use to predict future price movements by looking at how a stock has behaved in the past. This approach doesn’t require you to know every detail about the company. Instead, it relies on the belief that the market’s past behaviour can help forecast its future actions.

Stock prices tend to follow trends, and by analysing past price movements and trading volumes, traders can identify patterns that suggest where the price might go next. It’s a bit like reading footprints in the sand—you don’t know why someone walked a certain way, but you can follow their path to predict where they might head next.

Let’s look at how this works in practice.

How Technical Analysis Works in Practice

Take Reliance Industries as an example. Suppose you’ve been following its stock price for a few weeks and notice that every time the stock dips to ₹2,500, it rises back to ₹2,600. You don’t need to understand why this happens—all that matters is the pattern. ₹2,500 acts as a support level (where buyers enter the market) and ₹2,600 as a resistance level (where sellers dominate).

By recognising this pattern, you could decide to buy at ₹2,500 and sell near ₹2,600, making a potential profit. But to make effective decisions, you must also consider support, resistance, and volume, so let’s explore these concepts further.

Key Concepts in Technical Analysis

1. Price

Price is the most important aspect of TA because it reflects everything known about a stock. A technical analyst believes that everything you need to know about the stock is already reflected

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Now, price alone doesn’t give the full picture. Understanding the volume of trades helps paint a clearer picture of a stock’s movement, so let’s explore that next.

2. Volume

Volume refers to how many shares of a stock are traded at a given time. High volume signals a strong market move, while low volume suggests a weaker move. For example, if Tata Motors is seeing high volume and its price is rising, it signals strong demand. But volume alone isn’t enough; we also need to look at trends.

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3. Trends

A trend is the general direction in which a stock’s price is moving. Stocks can either move upward (bullish), downward (bearish) or sideways. Identifying trends helps traders decide when to enter or exit a position.

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But how do we know where these trends begin and end? By using concepts like support and resistance levels, we understand the potential turning points in a stock’s price.

Support and Resistance Levels

Two essential ideas in TA are support and resistance levels, key price points where stocks tend to reverse.

• Support Level: This is the price at which a stock tends to stop falling as buyers push the price up. In our Axis Bank example, ₹620 is the support level where buyers step in.
• Resistance Level: This is the price at which a stock tends to stop rising because sellers begin to dominate. For Axis Bank, ₹840 is the resistance level.

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These levels help traders decide when to buy (at support) and when to sell (at resistance), making it easier to manage risk and profit. However, to refine these decisions, traders also use tools like moving averages and RSI.

Tools Used in Technical Analysis

1. Moving Averages

A moving average smooths out price data over a specific period, such as 50 days, and helps traders identify the overall trend. If a stock’s price is above its moving average, it signals an uptrend.

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2. Relative Strength Index (RSI)

The RSI measures whether a stock is overbought or oversold. When the RSI is above 70, the stock might be overbought and due for a correction. When it’s below 30, the stock could be oversold and ready to rise.

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These tools help traders fine-tune their analysis, but it’s important to understand how TA differs from Fundamental Analysis.

How Technical Analysis Differs from Fundamental Analysis

While Technical Analysis focuses on price and volume, Fundamental Analysis looks at a company’s financial health. The two approaches are very different but can be complementary.

For instance:

• Fundamental Analysis is like reading a restaurant’s reviews and menu before deciding what to eat.
• Technical Analysis is like watching which restaurant has the longest line and assuming it’s good because so many people are eating there.

Now that you understand how they differ let’s conclude by explaining why technical analysis is such a valuable tool.

Why Use Technical Analysis?

The real power of Technical Analysis lies in its simplicity. You don’t need to be a financial expert. By focusing on past prices and volumes, you can make more informed choices about when to enter or exit trades. For a stock like Reliance, understanding its support and resistance levels gives you the tools to make profitable trades without needing to dive into its financials.

Technical Analysis is especially useful for short-term traders who need quick decisions based on real-time data. It offers a clear framework to spot trends, manage risks, and seize opportunities.

Conclusion

Technical Analysis allows traders to predict future price movements by analysing past price data and volume trends. By using concepts like support, resistance, and moving averages, TA provides a structured approach to trading. It doesn’t require deep knowledge of a company’s financials but instead focuses on patterns and trends in the stock market.

Whether you’re trading Reliance, Tata Motors, or Infosys, TA equips you with the tools to make smarter decisions, manage risk, and succeed in the market.