While Fundamental analysis govern the overall longer term moves in the trading markets, technical analysis helps us is in knowing the entry points, exits and stop-losses. There are always debates about fundamental analysis v/s technical analysis but the fact remains same that technical analysis do work. The economical fundamentals and the economies do not change in one hour or one day but the prices may change drastically during such small time periods. It also work because so many traders base their trades according to the signals generated by technical indicators and hence adding strength to those signals' reliability.
Market moves because of Fundamental factors, Psychological aspects and sentiments. For short term trading the later two i.e. psychology and sentiments play a big role. Short term trading is not just the fundamental analysis but the analysis of how various trading floors are thinking and behaving. Technical indicators help us analyzing the market-mood by analyzing how the market is moving. Technical indicators also become very important as the traders on the big trading floors also make their trading decisions based on the same indicators. But then when everyone is following more or less the same technical indicators for trading decisions then everyone should be making money? Well, the indicator would show a different picture if you are using a 30-minute chart or a daily chart. The skills lie in comparing different charts of different periods and then making your analysis.
Technical indicators in
Technical Analysis help us in analyzing the following:
1) Trend of the market: Whether there is an uptrend or downtrend or whether the market is moving sideways or without a trend.
2) If market has a trend then whether the trend is strong and hence offer us the opportunity to enter the market in the direction of its movement? What it means is if there is a uptrend which is strong then we can still buy but if there is an uptrend but its getting weaker then the market direction may reverse.
3) If the market is running sideways or in range then at what point we should buy and at what point we should sell or short-sell.
Technical analysis is broken into two main categories, chart patterns/trend lines (visual) and indicators (mathematical).
A very brief overview of some important Technical Indicators:
SAR (Stop and Reversal):
To determine whether a trend is ending and/or a new trend may start.
Bollinger Bands:
Bollinger Bands measure markets volatility.
To Give buying /selling signals during non-trending /sideways market.
To Have an idea when the market may enter into a trend while running sideways.
MACD:
MACD is used to identify a new trend.
Stochastic:
Stochastic oscillator, to identify where a trend might be ending and/or a new trend may start (indicating over bought/over sold levels)
RSI:
To identify whether a trend might be ending and/or a new trend may start (over bought /over sold levels).
RSI also can be used to confirm trend formations.
Moving Average:
To know resistance and support in sideways market
To identify trend reversal
ADX:
To know the strength of the trend
Fibonacci:
To know the probable support and resistance levels.
