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Wednesday, May 4, 2011

Technical Analysis (TA) and Investment

Technical analysis (TA) is a buzz word amongst traders but it is quite useful for investors too.
Technical analysis studies the demand and supply in the market to determine the direction in which price is expected to go.
Unlike fundamental analysis (FA), TA ignores the value and emphasises on momentum only. TA involves the study of price and volume data to explore the trend.
Fundamental Analysis tells us ‘what to buy’ while TA tells us ‘when to buy’.
To earn handsome profit an investor is supposed to buy at lowest possible price which is just impossible unless one has psychic powers.
It is always difficult for an investor to buy the stock at exact bottom but with the help of TA bottoming out of a stock can be perceived.

Above is the chart of the Axis bank, where price was consolidating in a falling wedge. Inside the wedge there were three rallies, where a common investor would have bought the share (denoted by red arrows).

But the savvy investor with the knowledge of TA would have bought the share at the breakout from the falling wedge (indicated by the green arrow).
Buying at the green arrow makes an investor to buy at a lower price than the price level indicated by top two red arrows.

It is interesting that the price denoted by third red arrow is lower than the green arrow but buying at the third red arrow was risky as chances of the price going down further were higher.
Buying at the breakout from the falling wedge, gave better returns than buying at the top two red arrows with much lesser risk.


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