Best 5 Technical Analysis Tools for the Indian Stock Market

The stock market can be both exciting and intimidating for investors. While the profit potential is enormous, the risks can be equally high. This is why investors must have the right tools and techniques to navigate the stock market successfully. One such effective method, used by traders to analyse the stock market, is Technical Analysis.

Technical Analysis involves studying price charts and market trends to identify patterns and predict future market movements. In this article, we explore the top five Technical Analysis Tools that help traders and investors gain a competitive edge in the stock market.

If you're looking to improve your trading skills and increase your profitability, read on to discover the best Technical Analysis tools for Indian Stocks.

The Stochastic Oscillator

The Stochastic Oscillator is a popular Technical Analysis tool, used to analyse market trends and identify potential buy and sell signals. George Lane developed it in the 1950s, and since then, it has since become a widely-used tool in the stock market. Here’s why:

To effectively manage your trading positions, it's essential to consider the potential risks of overbought and oversold conditions. 

1. When a market becomes overbought, it may be wise to book profits on any existing buy positions and avoid opening new ones, as the market may be due for a correction. 

2. Conversely, when a market becomes oversold, it may be prudent to take profits on existing sell positions and avoid opening new sell positions, as the market may be due for a rebound.

Calculation 

%K= (today’s Close) - (Lowest low over a selected period) / (Highest over a selected period) - (Lowest low over a selected period)

Interpretation 

The main line oscillates between 0 and 100, indicating the level of the stock's momentum. A reading above 80 suggests that the stock is overbought, while a reading below 20 indicates that the stock is oversold. The Stochastic Oscillator is interpreted by  %K.

Parabolic SAR

Parabolic SAR is a well-known tool for technical Analysis, and traders use it to identify potential reversal points in the price of an asset. It works by plotting a series of dots above or below the cost of an investment, which can indicate when the trend is changing. 

The dots move closer to the price when the trend is strong and move further away when the trend is weak. Traders may use the Parabolic SAR and other tools to confirm trading signals and help manage risk.

Aroon

Aroon is a technical analysis tool traders use to identify trends and potential trend reversals in the market. It consists of two indicators, Aroon up and Aroon down, plotted as lines on a chart. The Aroon up measures the strength of an uptrend, and the Aroon down measures the power of a downtrend. 

Traders can use these lines' crossover and other technical indicators to determine when to enter or exit a trade. 

Calculation 

1. Aroon Up – ((N – Days Since N-day High) / N) x 100

2. Aroon Down – ((N – Days Since N-day Low) / N) x 100

The ‘N’ value represents the number of periods used, with a default value of 14 for many traders. 

Interpretations

1. When the Aroon up crosses above the Aroon down, it may indicate that a new uptrend is beginning. Conversely, when the Aroon down crosses above the Aroon up, it may signal that a recent downtrend is starting. 

2. The Aroon can also determine the trend's strength up and down lines' values. Values closer to 100 indicate a strong trend, while values closer to 0 suggest a weaker trend. 

3. Traders may also use the Aroon tool to identify potential trend reversals, as a divergence between the Aroon indicator and price movement may indicate a shift in market sentiment. 

The On-Balance Volume Indicator (OBV)

Traders use the On-Balance-Volume (OBV) indicator to track the market volume flow. It works by calculating the cumulative total of the volume of an asset, adding volume on up days and subtracting volume on down days.  

Calculation  

Three rules are implemented based on changes in the closing price of an asset. 

1. If the closing price is higher than the previous day

Current OBV = Previous OBV + today's volume

2. If the closing price is lower than the previous day

 Current OBV = Previous OBV – today's volume

3. If the closing price is the same as the previous day

Current OBV = Previous OBV

Interpretation

The On-Balance Volume (OBV) indicator is interpreted by analysing changes in the OBV line, which represents the cumulative total of the volume of an asset. When the OBV line is rising, it suggests that the magnitude of the investment is increasing:  potentially indicating the bullish sentiment in the market. 

Conversely, when the OBV line is falling, it suggests that the asset volume is decreasing, potentially indicating bearish sentiment. Traders may also look for divergences between the OBV line and the asset's price, which may predict potential market reversals.

Simple Moving Averages (SMA)  

The Simple Moving Average (SMA) is a famous technical analysis tool that traders use to identify trends in the price of an asset. It calculates an investment's average cost over a specified period, and then plots that average on a chart. 

This line smooths out the fluctuations in price, making it easier to identify overall trends. The most commonly-used periods for calculating SMA are 50, 100, and 200. When the asset's cost is above the SMA, it is often seen as a bullish signal, indicating the trend is up. 

Conversely, when the price is below the SMA, it is often seen as a bearish signal, indicating that the trend is down. Traders may also use the crossover of two SMAs as buy or sell signals. 

Conclusion 

Technical analysis tools are valuable resources that can aid traders in making informed decisions in the stock market. By analysing price action and market trends, traders can gain insights into the behaviour of stocks and make predictions about future movements.  

However, it's important to remember that technical analysis is not a foolproof method and should be used with other analysis methods and market research to make sound investment decisions.

Note: To help plan your trading activities and investment strategies, find here the NSE Holidays 2023, BSE Holidays 2023, MCX Holidays 2023, and Muhurat Trading 2023. Also see here to know more about the stock market timings.

Disclaimer

The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.