What is Technical Analysis?

Technical analysis is defined as the process of identifying trends and trend reversal at an early stage.

The stock market study relies on two different methods of arriving at the answers to the investor’s problem of what and when. In the parlance of “the street’, one of these is commonly referred to as the fundamental and the other as the technical.

Fundamental analysis is the examination of the underlying forces that affect the well-being of the economy, industry groups and companies. The goal is to drive a forecast and profit from future price movements. At the company level, fundamental analyses may evolve the examination of the auditor’s reports, the financial data, the dividend records, policies of the companies, managerial abilities, plant capacity, the competition and so on, At the industry level, there might be an examination of supply and demand forces for the product and also examine the economic data to assess the present and future of the economy and arrives at the intrinsic value of the stock.

The fact is that the real value of a share is determined at any given time solely, definitely and inexorably by supply and demand for the share. Of course, the statistics which the fundamentalists study play a part in the supply – demand equation – that is freely admitted. But there are many other factors affecting it. The market price reflects not only the differing opinions, but also the hopes and fears and guesses and moods, rational and irrational, of hundreds of potential buyers and sellers, as well as their needs and their resources. In Technical Analysis, an analyst tries to predict price changes by studying the market itself.

Technical analysis is the science of recording, in graph form, the actual stock trading history (i.e. price and volume changes) in stock and from that pictured history predicts the probable future trends.

Over time many theories have been formulated. These theories have been in existence for a number of decades in the western world. The Elliot Wave Theory was formulated by Ralph Nelson Elliot in 1935. The Japanese Candlestick Technique was developed by a rice future trader, Sokyu Honma, W.D.Gann (1875-1955) developed some techniques and trading principles. Wells Wilder developed some techniques to gauge the direction and strength of the direction, and Tushar Chande contributed a bold new array of dynamic, price-based, and risk control indicators. We will look at other contributors in another article.

A must read book list for Serious Traders

There’s nothing quite like Stock Market to get lost, be it trading or reading! There are so many trading books out there; how many are worthy of your time and money? Here is my list that will help you to shorten the invested time and lengthen your learning curves and achieve your trading goals, whichever market you trade in- futures, stocks, or currencies- and whichever trading style you use – trend, swing , or day.

  • Reminiscences of a Stock Operator - by Edwin Lefevre

There is no doubt that this book is on top. The reading is both entertaining and informative. Lefevre has captured the mind of a great trader – Jesse Livermore as well as the nuances of the market with great talent. ‘Reminiscences…’ is recommended by most of the top traders in the world. It is also the most-quoted trading book. My favorite is “There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”

  • Market Wizards: Interviews with Top Traders  - by Jack D. Schwager

This fantastic book allows a peek into the mind of the world’s most successful traders. Interviews with Million and even Billion dollar traders in this book will equip you on what it takes to win. Some remarkable interviews are - Richard Dennis, the father of Turtle Traders- reportedly started with a shoestring and made $200 million in about ten years, Paul Tudor Jones- worth $2.8 billion and ranked by Forbes in 2009 as the 224th richest person in the world and Bruce Kovner- the 164th richest person in the world, worth $3.5 billion and ranked by Forbes in 2009). I learnt a lot from the interview of Ed Seykota.

  • The New Market Wizards: Conversations with America's Top Traders - by Jack D. Schwager

Another market wizard book by Schwager. Book is full of wisdom from great traders.

  • Trading Systems and Methods - by Perry J. Kaufman

"Probably the most comprehensive guide to trading systems ever written from one of the foremost experts in the field. This is an invaluable reference work for anyone with an interest in trading systems." -- Jack D. Schwager, author, Market Wizards and The New Market Wizards This is also my personal favorite.

  • Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude - by Mark Douglas

Most novice traders have spent lots of time and energy to search for the ‘Holy Grail’ in the trading. Having tried all kinds of indicators and trading systems, they have overlooked the most important factors of successful trading. So don’t overlook this book! It’s a perfect book for learning trading psychology.

  • My Life as a Quant: Reflections on Physics and Finance - by Emanuel Derman

Derman relives his exciting journey as one of the first high-energy particle physicists to migrate to Wall Street. Page by page, Derman details his adventures in this field—analyzing the incompatible personas of traders and quants, and discussing the dissimilar nature of knowledge in physics and finance. Throughout this tale, he also reflects on the appropriate way to apply the refined methods of physics to the hurly-burly world of markets. A gripping one.

  • Fooled by Randomness - by Nassim Nicholas Taleb

This one is loaded with crackling little insights. Want a bite of it? Here- What looks like skill is often plain old luck, so beware of investment geniuses. They will get their comeuppance, just as Solon warned.The theme of the book is not developing stock-picking ability but cultivating a frame of mind that appreciates the role of luck and the propensity in making all of us confuse fortune with reason.Taleb, mind you, is a trader. He’s also a fellow at the Courant Institute of Mathematical Sciences at New York University, where he teaches a course on the failure of models. An MBA from Wharton and a PhD from the University of Paris, his expertise is in Skeptical Empiricism. He casts doubt on the things most people think they know for certain. I love this book.

  • Trade Your Way to Financial Freedom - Dr. Van Tharp’s

This book is by far the best work I’ve seen on position sizing, expectancy and money management. I highly recommend it. You may get the book here .