Stock Markets are highly volatile. These sharp movements that occur in stock prices give us great opportunities to make profits, if one can time the markets. However, majority of the traders/investors find themselves on the losing side and end up making huge losses. This is mainly due to the characteristic of the human mind viz – Greed, Fear and Hope. Some people never book profits as they are greedy for more profits. Whereas some panic and book losses in the fear of losing heavily only to see the stock move the way they had predicted after they have exited from the stock. The worst affected are those people who are on the wrong side of the market trend but still hold on to a stock in the hope that their price levels will come sooner or later.
Hence, in order to make profit and cut ones losses from the stock market, study of Technical Analysis becomes essential. Technical analysis is the study of price charts along with volumes. The charts take into account everything that is likely to impact the prices, some of the factors being fundamental reasons, stock specifics news/results, occurrence of events affecting some sectors/stocks, political events, natural disasters etc. In short, Technical analysis study includes everything that can impact the prices and the way the prices move indicate the future price trends or the direction in which the stock prices are likely to move in the future. Sometime, patterns are formed in the price charts, these patterns depict the psychology of the masses and these patterns will work across all the markets viz. Equities, Commodities, Currency etc. Hence we can say, Technical Analysis helps in spotting changes in trends and prices patterns based on which one can take timely investment/trading decisions. It is a very effective tool to time the markets i.e. determine the enter levels, the stop loss as well as the targets levels.
But, a word of caution here is that Technical Analysis is not infallible, as it is linked to the psychology of the masses and minds of people can be confused, fluctuating and indecisive at times. At such times Technical analysis may fail or may not give clear indications of the direction of the stock market.
Though Technical analysis is being practiced in the west as well as some Asian countries like Japan for more than 100 to 150 years, it has become popular in India only in recent years.