Sunday, 23 September 2018

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Technical Analysis

Technical analysis is the understanding of the price action of a company’s underlying stock. It utilizes various charts and statistical indicators to determine price support and resistance, range and trends. It identifies historically relevant price patterns and performance to help forecast potential direction of the stock. This methodology focuses only on the price of the shares, not the operations of the company.

How Does Technical Analysis Work:

By using historical price data, technical analysis attempts to interpret the supply and demand that moves share prices. Technical analysis visually trails the activity of the stocks using various charts and indicators to pinpoint price areas of strong interest both in terms of buying and selling. History tends to repeat itself as confirmed by price patterns.
Anyone who trades or invests in the stock market or any other tradable financial instrument should consider learning at least a basic level of technical analysis. Technical analysis will help trader make better-informed decisions as to how much risk to employ for how much potential reward.
Stocks represent the underlying company’s business and operations. However, the discernment and future valuation of the company and its performance is reflected into its stock price. There is often a divergence between the two. Technical analysis also helped to determine where the divergence lies and how much opportunity may exist.

Basics of Technical Analysis:

Technical analysis rivets and utilizes various tools and indicators. The tools can be used to generate converging signals that improve the probability of a direction price move.

Stock Charts:

Technical analysis seeks to construe the part of a stock’s price action. The general types of charts are candlestick, bar and line charts. Charts plot the prices where trades have been executed. The time interval of the chart can be specified through the settings. Time intervals segment the price action of the stock. For a 5-minute candlestick chart, each candle represents a five minute segment of trading that record the starting price (open), the highest price (high), lowest price (low) and last price (close) trade during the period. As the five minute handle ends, it will display a candlestick that details the four data points (open, high, low, close) and a fifth data point that summarizes the opening and closing price and colors the body red if the last trade (close) is lower than the first trade (open), or green if the last trade (close) has a higher price than the first trade (open). Bar charts include the same information without coating the body. Line charts simply connect the closing price only for each time period.

Support and Resistance

By visually marking the charts, users can see certain price levels that tend to prevent prices from falling any further before rising back up again. These are known as price support levels. Users will also spot price levels that continue to provide a ceiling, those eventually causing prices to fall back down again after testing. These are known as price resistance levels.

Stock Volume

Volume measures the total number of shares traded for a specified period of time. It is used as a measure of interest that can obvious into significant price action. High volume indicates significant trading activity that triggers a breakout or a breakdown accompanied by a sustaining trend in prices. Breakouts result in higher trending prices and breakdowns result in lower trending prices. When volume is low, stocks tend to split around in a range known as consolidation.


Trends indicate the current direction of share prices. When stock prices continue to rise higher, it is considered to be in an uptrend and vice versa for a downtrend. Up trends indicate increasing demand for shares, as buyers are willing to pay higher prices as supply diminishes. Downtrends represent an oversupply of shares with waning buying interest resulting in falling prices. By connecting the various high and low points on a chart, you can manually generate trend lines that pinpoint support and resistance and direction of stock prices. When compared to historical templates of similar trend lines, you may be able to forecast the future direction, revolving points and targets.

1 comment:

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