Using Technical Analysis And Stock Charts: A Beginner's Guide

By Author: Neha Jain
Total Articles: 6
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What is Technical Analysis
This type of analysis is done to evaluate securities through the analysis of statistical trends that are gathered from all your trading activity. These activities can include price movements or trade volume. As compared to Fundamental Analysis where the present financial health is evaluated, Technical Analysis aims to predict the future stock market trends by analyzing current trends and patterns.

Types of Stock Charts

There are a multitude of stock chart types that serve varying purposes. The first is the Line Chart, that tabulates the closing prices over a period of time. This gives a quick overview of the performance of the stock market. The second type is the Bar Chart, that displays the opening, closing, high, and low prices, over a period of time which is usually a day, week, or month. This provides greater information about the status of the stock market. The third kind is the Candlestick Chart, where each ‘candlestick’ represents the opening, closing, high, and low prices. And, if the body of the candlestick is filled then that indicates that the stock closing prices ...
... were lower than the opening prices (bearish). Instead, if the candlestick body is empty then the stock closing price was higher than the opening price (bullish).

Key Components of a Stock Chart

There are three important components of any stock price chart that one should know about - the price, the volume and the timeframe. Volume represents the number of shares traded during a specific period. A high volume often accompanies a notable stock price movement. Stock charts can be viewed in various timeframes like daily, weekly, monthly, or intraday. Shorter timeframes are useful for day trading, while longer timeframes are better for long-term investing.

Key Technical Indicators

There are several technical parameters that if tracked properly can yield even more information to us about the companies offering the stocks. These are Moving Averages, Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Bollinger Bands. The Simple Moving Averages (SMA) calculate the average of the closing stock prices. They are usually calculated over a 50 day or a 200 day period. On the other hand, the Exponential Moving Average (EMA) gives more weight to recent prices, to be more responsive to newer information. Relative Strength Index (RSI) measures the speed and change of price movements. The next parameter Moving Average Convergence Divergence (MACD) Shows the relationship between two moving averages. Finally the Bollinger Bands consist of a middle band (SMA) and two outer bands that represent standard deviations from the middle band. They capture the market volatility information and identify overbought or oversold conditions.

Common Chart Patterns

The "Head and Shoulders" pattern is a classic reversal pattern indicating a potential change in trend. It consists of three peaks: a central, higher peak known as the "head" flanked by two smaller peaks called the "shoulders." This formation suggests that the existing trend is weakening and a reversal might be imminent.

The "Double Top" and "Double Bottom" patterns are also significant reversal indicators. A double top forms when the price reaches a high level twice and fails to break through, indicating a bearish reversal. Conversely, a double bottom occurs when the price hits a low level twice and rebounds, signaling a bullish reversal.
Triangles are another essential chart pattern in technical analysis. An "Ascending Triangle" is a bullish pattern characterized by a rising lower trendline that meets a horizontal resistance line, suggesting an upward breakout. A "Descending Triangle" is bearish, featuring a descending upper trendline converging with a horizontal support line, indicating a potential downward breakout. A "Symmetrical Triangle" is neutral and indicates a period of consolidation before a breakout, which can occur in either direction.
"Flags and Pennants" are short-term continuation patterns that signify a brief period of consolidation before the previous trend resumes. Flags appear as small rectangles sloping against the prevailing trend, while pennants are small symmetrical triangles.

Steps to Using Technical Analysis

The first step in technical analysis is to identify the trend. Determine whether the stock is in an uptrend, downtrend, or sideways trend. This can be confirmed using moving averages and trendlines. Next, analyze the volume to confirm price movements. Look for volume spikes, as high volume during a price increase suggests strong buying interest. Incorporate indicators and oscillators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) to assess the trend's strength and momentum. Pay attention to any divergence between the price and these indicators, as this can signal potential reversals. Look for chart patterns that suggest the continuation or reversal of the current trend. Pattern breakouts can serve as reliable entry or exit signals. Finally, set your entry and exit points based on your analysis. Use support and resistance levels, moving averages, and identified patterns to guide these decisions. By following these steps, you can use technical analysis to make more informed trading decisions.

Conclusion

Reading stock charts and using technical analysis is an essential skill for traders and investors . FortuneTradingAcademy helps understanding different chart types, key indicators, and common patterns, you can make more informed trading decisions and increase your chances of success in the stock market. Remember, while technical analysis can provide valuable insights, it’s important to combine it with other forms of analysis and maintain a disciplined approach to trading.

Reference: https://medium.com/@nehajainfta/using-technical-analysis-and-stock-charts-a-beginners-guide-9c5d792f4213