Technical analysis means the application of past price, volume and other market statistics to predict future prices. Technical analysis, on the other hand, deals exclusively with reading charts and plotting lines of price change, buying low to sell high.
The Basics of Technical Analysis
- Price and Volume:
The basis of technical analysis is price and volume. Price reflects the market’s assessment of a security’s worth, while volume measures just how much force there is behind price movements.
- Trends and Trendlines:
Recognizing trends is one of the most important parts about technical analysis. Trends can be upward (bullish), downward (bearish) or sideways. Trendlines provide a way to see and confirm the direction of change.
- Support and Resistance:
These are the key price levels that investors often monitor, at which a stock tends to change direction. Knowing these levels is important in anticipating possible price reversals.
Key Indicators and Oscillators
- Moving Averages:
Moving averages smooth out the price line, producing a single flow. It is easier to pick up trends in this way. Examples include the simple moving average (SMA) and exponential moving average (EMA).
- Relative Strength Index (RSI):
The RSI, a momentum oscillator that reflects price movement speed and change. It also helps identify overbought or oversold conditions, signalling potential reversals.
- Bollinger Bands:
Bollinger bands are a middle band that is an N-period simple moving average and upper and lower volatility bands. These bands can help find possible breakouts or breakdowns.
You can use a stock screener tool to check the selected stocks according to your preferred criteria.
- Head and Shoulders:
The renversion pattern indicates that a trend change may be possible. Three peaks, a taller one between two smaller ones (head between shoulders).
- Double Tops and Bottoms:
These patterns suggest a possible turning of the tide. After an uptrend, a double top forms; after a downtrend, the opposite is true–a double bottom.
- Flags and Pennants:
Flags and pennants are continuation patterns that indicate a temporary levelling off before the old trend resumes.
Strategies for Smart Trading
- Trend Following:
This strategy is to spot the trend and follow it. The traders want to be in positions going with the trend, surfing on the momentum as a possible source of profits.
- Contrarian Trading:
Contrarian traders bet against the market’s psychology. They feel markets are prone to over-react, and look for chances of the pendulum reversing.
- Breakout Trading:
Breakout traders identify important support or resistance levels, and buy (or sell) when the price breaks through these points. This may indicate that a trend will continue.
Technical analysis is like a compass in the ocean of financial markets, leading you through all those waves and market tides. Knowing what to look for and learning how it works, you can trade with confidence.
Technical analysis, like any art or science, is a subjective endeavour. One needs practice, the ability to learn continuously and a good eye for patterns. Chart your course; analyse with precision, and navigate the markets confidently. Now open the door to smart trading decisions.