Today, on the #MotivationalMonday Financial Desk, we have
- What is technical analysis?
- What is Fibonacci retracements?
- Advantages of Fibonacci Retracement
- Conclusion
What is Technical Analysis?
If you are a trader or have recently developed an interest in the stock market, mastering technical analysis is imperative. Technical analysis helps a trader predict the future performance of stocks. It is a tool or process that leverages market data to forecast future trends. Sounds helpful, doesn’t it? Especially when the stock market has become the most happening place, thanks to tariffs and the related uncertainty (we sometimes call it drama as well!). The Indian stock market just made a wholesome recovery, and now is the time to learn and invest. Technical analysis considers several factors, including but not limited to sales and earnings, as well as volume and price. According to this principle, historical trading activity and price movements in the securities are taken as reliable indicators. Technical analysis uses various charting tools to generate data points for short-term trading. Unlike fundamental analysis, analysts do not consider a company’s valuation in technical analysis. Instead, they solely rely upon historical trading data. A few notable aspects of technical analysis include:
- History returns - Technical analysis is rooted in the idea that history repeats itself over time. This observation is derived from the behaviour of traders during a price change. Surprisingly, they tend to behave similarly when the price goes in a specific direction. For instance, traders panic when prices drop and the urge to sell is high. Yes, your emotions are also studied here!
- Trends matter - Instead of keeping the price fluctuations central to the observation, the analysts look at the bigger picture—market trends. Every price fluctuation or movement in the market is triggered by a market trend. When a trend is established, a stock’s price tends to move in the same direction.
- Questions matter - Instead of asking why, the technical analysis answers ‘how.’ As discussed above, it observes a trend and tries to understand how a particular trend has shaped the market.
What is Fibonacci retracements?
Let’s go back to the high school mathematics classroom. Yeah, that long (sometimes extra long) lecture on series and endless numbers. Somewhere between yawning and thinking of yawning again, we studied the Fibonacci series. And most of us asked one another, “Why am I even studying this? Where am I going to apply this?” Well, the answer is the stock market. Did you see that coming? Aren’t you a little shocked that what you learnt in your high school classroom can help you become a good trader? Let’s dive deep into it. The Fibonacci series is a sequence of numbers starting from zero arranged so that the value of any number in the series is the sum of the previous two numbers. Do you remember the Fibonacci series? (Sigh!)0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610…The series extends to infinity, just like your indifference to mathematics. Now, let’s discuss Fibonacci retracements. It’s a widely used technical analysis tool. They involve drawing a trend line between two significant price points, then dividing the vertical distance between them into horizontal lines at key Fibonacci ratios: 23.6%, 38.2%, 61.8%, and 100%. The Fibonacci Retracement tool allows users to configure up to 24 Fibonacci levels, including the 0% and 100% levels set by the initial trend line’s extreme points. Internal retracement levels fall between 0 and 1, external retracement levels exceed 1, and extensions are below 0. Each level has a checkbox to toggle its visibility on or off.
Advantages of Fibonacci Retracement
- It serves as a support level when the price retraces from its initial upward or downward movement. The concept is that after a significant price movement (upward or downward), the price often retraces in the direction it came from.
- It helps analysts predict potential future price movements.
- It is a versatile tool as it can be applied to a range of assets and timeframes.
- Fibonacci levels help traders establish practical profit targets and stop-loss orders, aligning with market patterns and individual risk preferences.
- Fibonacci levels provide clear visual markers for traders, aiding in the anticipation of price movements and strengthening market analysis.
This is your sign to take your phone, call your maths teacher and say thank you.
Conclusion
Learning advanced technical analysis techniques will help you formulate a solid trading and investing strategy. Keep an eye out for changing market trends and master the art of assessing them to leverage the opportunities. Happy trading!
Thank you for reading. Drop your questions in the comments or DM us right away for more details.