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Using technical analysis to predict stock market trends

  • Posted Date: February 4, 2023
Technical analysis

When trading stocks, using technical analysis to predict market trends is constantly taken into account. Any experienced stock trader will inform you that without understanding market patterns, traders get lost. With the help of trends, you may determine if the market is moving in an upward, downward, or stable direction and learn something about probable future possibilities. Many traders research past market patterns that are consistent with local conditions. For instance, understanding past market behaviours during comparable inflationary or economic downturns may be useful in analysing a stock’s potential returns. By frequently analysing the markets, you can also be able to choose a certain industry to invest in.

It’s critical to understand how any marketplaces you trade in operate. How are you going to trade without knowing how the market works? This crucial lesson signifies the beginning of your trading experience. You won’t be capable of making wise judgments and, therefore, profitable ones unless you understand share market analysis or stock market technical analysis.

Technical Analysis: What Is It?

By examining statistical patterns gleaned from trading activity, including price movement and volume, technical analysis is a trading profession used to assess investments and spot market opportunities. Technical analysis relies on the examination of volume and price as opposed to fundamental analysis, which seeks to define a security’s worth based on financial metrics like profits and revenues.

How do trends work?

A trend is the stock’s overall movement in a certain direction. The trends change direction either upwards or downward depending on whether the marketplace is bullish or bearish. A trend should last a certain amount of time to be categorised as a trend, but the trend is becoming more significant the longer it persists (upward-downward). Instead of selling stocks as fast as they experience an uptrend for a little duration, holding onto equities for a longer length of the trend helps traders generate significant profits.

Traders evaluate market inclinations and decline to determine whether to purchase or sell shares. On the basis of prior comparable patterns and share market analyses, traders sometimes make decisions to keep onto equities that have performed consistently in the past. Market trends provide insight into the direction of certain firm stocks as well as several industrial sectors.

How do you use technical analysis to predict market trends?

Technical analysis is often used in combination with other types of study by professional economists. Retail traders can base their conclusions only on a security’s price movements and comparable data, but in practice; stock analysts seldom confine their study to just basic or technical analysis.

Any asset with a trading history may benefit from technical analysis. Currencies, stocks, commodities, futures, fixed-income, and other assets are included in this. Technical analysis is really far more common in the commodities and currency markets, wherein traders pay attention to short-term price changes.

Stocks, futures, bonds, and currency pairings are just a few examples of tradable instruments that are often susceptible to demand and supply forces and can be predicted using technical analysis. In truth, many people believe that technical analysis is just the study of demand and supply dynamics as they embody changes in a security’s market rate.

The most familiar application of technical analysis is to price instabilities, though some analysts also hold their gaze on other metrics like open levels of interest or trade volume.

Technical analysis: Indicators

To help technical analysis investing, experts have created hundreds of trends and signals that are used across the business. To anticipate and trade on price fluctuations, technical analysts have created a wide variety of trading methods.

Although some indicators are mainly concerned with detecting the current market trend, particularly support and resistance levels, some are more concerned with assessing a trend’s intensity and the chance that it will persist. Trendlines, moving averages, channels, and momentum indicators are among the frequently used technical indicators as well as charting patterns.

Technical analysts often look at the primary categories of indications below:

  • Price trends
  • Volume and momentum indicators
  • Chart patterns
  • Support and resistance levels
  • Moving averages
  • Oscillators

Underlying predictions of technical analysis

The two main techniques for evaluating securities and choosing an investing strategy are technical analysis and fundamental analysis. Although technical analysis believes that a price of an asset already represents all publicly available data and instead concentrates on the statistical examination of price fluctuations, the fundamental analysis examines a company’s financial records to establish the true worth of the firm.

Instead of examining a security’s intrinsic characteristics, technical analysis looks for patterns and trends in order to comprehend the sentiment underlying price movements.

A number of editorials by Charles Dow on technical analysis theory have been published. Two fundamental presumptions from his publications have been the cornerstones of technical analysis trading ever since.

  • Markets are effective at reflecting the elements that affect a security’s price via valuations, but
  • Even seemingly random price changes on the market seem to follow recognizable patterns and trends that often recur over time.

Dow’s work is still used today in the realm of technical analysis. Market analysts often subscribe to three underlying tenets of the field:

  • Everything is discounted on the market: The fundamentals of a firm, general market variables, and market psychology, according to technical experts, are all already included in the share price. The Efficient Markets Hypothesis (EMH), which draws a similar conclusion regarding pricing, is consistent with this point of view. The only thing left is to analyse price changes, which technical analysts believe to be the outcome of market supply and demand for a certain stock.
  • Price trends and movements: Regardless of the time range being analysed, technical analysts anticipate that prices will display tendencies even in seemingly random market moves. To put it another way, a stock price is more likely to stick with a previous pattern than to fluctuate unpredictably. On this premise, the majority of technical trading methods are built.
  • History that repeats again: Market psychology, which has a tendency to be quite foreseeable depending on emotions like anxiety or excitement, is sometimes blamed for the repeated pattern of price fluctuations. Technical analysis analyses chart trends to analyse these emotions and subsequent market movements and identify trends. Despite the fact that many technical analysis methods are more than a century old, they are nevertheless viewed as valuable because they reveal patterns in often-occurring price movements.

What predictions are made by technical analysts?

Technical analysts that work on the subject generally agree with three fundamental principles. The first prediction is that the market discounts anything, just as the efficient market theory claims. Second, irrespective of the time period being analysed, they assume that prices will display tendencies even in seemingly random market moves. Lastly, they think that history often repeats itself. Marketplace psychology, which has a tendency to be quite predictable based on emotions such as anxiety or excitement, is sometimes blamed for the repeated pattern of price fluctuations.

Limitations of technical analysis

According to certain analysts and research scientists, the EMH proves that historical volume and price data do not include any meaningful intelligence. However, using the same logic, business basics should also not offer any actionable information. The moderate form and semi-strong version of the EMH are referred to as these vantage points.

Another argument against technical analysis is that because history does not always repeat itself precisely, studying price patterns is of doubtful value and should not be taken seriously. Assuming a curved path seems to be a better fit for pricing models.

Thirdly, technical analysis is criticised for sometimes working, but only because it is a self-fulfilling prophecy. For instance, a lot of technical traders may set a stop-loss order under a company’s 200-day trend line. When the stock hits this price after a large number of investors have done so, there will be a high number of sell orders, which will cause the stock to decline, confirming the trend traders had predicted.

When other traders see the price dropping, they will sell their holdings as well, strengthening the trend. Although this short-term selling force may be self-fulfilling, it won’t have much of an impact on the asset’s price in a few weeks or months.

In short, even if a small number of traders may influence price movements in the short term if they all use the same signals, individuals cannot control prices over the long term.

Why is it necessary for you to analyse share market trends?

In order to begin analysing share market trends, we must first decide which sector to choose since there is a large amount of data concerned. Either the sort of business, such as the pharmaceutical industry, or the form of investment, such as the bond market, might be the emphasis. You can only begin analysing a sector after you have chosen it. Analysis of stock market trends takes into account both internal and external influences. Changes in a related sector or the implementation of a new law fall under the category of market forces. Then, using this information, analysts make an effort to forecast the future course of the market.

You need to comprehend the logic behind the share market trading trend if you’re a trader. Similar to how you wouldn’t drive your vehicle at the wrong moment on a one-way street, it is advised not to trade against market trends.

The objective is to pay close attention to the area the stocks are related to, any geopolitical or other variables that have impacted such a sector’s stocks in the past, and how market volatility has affected any such stock in order to make the best use of trend analysis mostly in the stock market. Therefore, stock market research will inform you precisely how to trade with that specific stock before you buy any stocks of a given firm. Additionally, it could suggest how much of your wealth you should invest in the stock.

How can one determine if a stock market trend is reliable?

The sequence of price fluctuations must be real for it to be a significant trend and not merely an oddity, as there is no time limit for a movement to be deemed a trend. And you should be able to recognize it as an investor. So, here are the top five guidelines for trend analysis of the stock market.

Three data points are required; a trend is only regarded as reliable if there are some points of contact.

  • Direction: Trends may go in one of three directions: up, down, or sideways. All three sorts of trends may be seen on the same chart if you observe prices over an extended period of time.
  • Pay attention to the slope: A trend’s slope tells you how much the value should change every day. A definite tendency is shown by steep lines that are travelling either upward or downward. The legitimacy of the trend and its predicting abilities are both called into doubt if the line is excessively flat, however.
  • Time the trend: The length of time affects a trend’s viability. In general, monthly time series are more significant than weekly prices, which are more significant than daily prices.
  • Long-lasting: The more time a trend has been in effect, the more weight it holds.

If you completely educate yourself on stock market analysis as well as equity, you can use them to support your research and produce beneficial outcomes.


The impact of demand and supply on changes in volume, price, and implied volatility is examined using technical analysis methods. It works on the presumption that, when combined with suitable investing or trading rules, historical trading activity and price increases of security may serve as important predictors of the security’s future prices.

One can learn technical analysis in many different ways. Learning the fundamentals of investing, markets, stocks, and financials is the initial step. All of this can be learned via books, online learning, classes, and other resources. Once the fundamentals are grasped, you may go on to using the same resources, but ones that concentrate only on technical analysis.

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