Find Trading Opportunities using Technical Analysis

Find Trading Opportunities using Technical Analysis



What is Technical Analysis?


There are various ways to understand the market, whether it be through intuition, fundamental or technical analysis. Like others, technical analysis is also used to predict the course of prices of a security according to the historical data. It helps to analyze the trend of the market without analyzing the prices chart. But the premise behind it is based on several factors, it is assumed that the market knows everything about it, which is reflected through the trends in the price changes. The analysis can be done on different timeframe candle-sticks namely 1 min, 5 mins, 15 mins, 30 mins, 1 hour, etc. And the parameters through which one can do the technical analysis are known as Technical Indicators which is explained in the next section.


Technical Indicators

Technical Indicators are mathematical computations on different parameters of the security such as OHLC Prices, Volume, etc. with the help of which a trader can examine the markets and conduct trades. They help in determining either the trend, momentum, or entry/exit points in the market. 


Some of the commonly used Technical Indicators are:

Volume-Weighted Average Price (VWAP) 

Volume-weighted Average Price also known as VWAP is a lagging-indicator which is calculated as the sum total of trading value of the asset/security divided by the total trading volume in that period. It is assumed that the price tends to move back to its average price hence traders sell the asset when its price is greater than VWAP or buy it when the price is lower. This can also backfire in markets with strong uptrends where price keeps on rising continuously and doesn’t come back to VWAP.


The basic formula to calculate VWAP is : 

VWAP = {sum{Price * Volume}}/{sum{Volume}}


Simple  Moving Average(SMA)

Simple Moving Average abbreviated as SMA is simply the average of a given range of prices( generally the Closing Price), divided by the total number of period. It helps to determine whether the price-trend will be maintained or get reversed.

SMA = (Number of Periods−Period sum)/Number of Periods

Exponential Moving Average (EMA)

Exponential Moving Average (EMA) is similar to Simple Moving Average (SMA) and is used to estimate the trend direction during a particular time-period. Although, as compared to SMA, EMA is more sensitive to price changes  but EMA can help identify the trends before SMA.

The formula for EMA is:


EMA = [Exponential Smoothing Constant x (CMP - EMA of the Previous period)] + EMA of the Previous period

 

Moving Average Convergence Divergence(MACD)

Moving Average Convergence Divergence commonly known as MACD is a lagging trend-based momentum oscillator indicator which depicts the relation between the 2 EMA's of the security. Generally, a bullish signal is when MACD advances over the signal line, and bearish when it advances below it.

The formula for MACD is :


MACD =  (12-period EMA) - ( 26-period  EMA)

Relative Strength Index (RSI)

The Relative strength index (aka RSI) in  Technical Analysis is a leading-momentum indicator which assesses the amount of change within the price of a security. It ranges from 0 to 100. Any asset/security is generally considered to be as overbought when it’s RSI value is above 70 and oversold when it’s below 30. The formula to calculate RSI is:

RSI = 100 – [100 / ( 1 + (Average Gain / Average Loss ) ) ]

Let us now see how we can access these indicators on the IIFL Markets App

Click on the Chart>Indicators>Select the Indicator you want to apply

Here we have taken an example of  VWAP in ADANI PORTS Price Chart

 

There are several other technical indicators that are used by institutions/ retail traders while trading. Some of them are Bollinger Bands, Average Directional Index, Fibonacci retracements, etc., which will be explained in the upcoming blogs.


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