Comprehending the Stock Market through Technical Analysis (Part One)
The art and science of examining stock chart data and predicting future stock market movements is called technical analysis. This style of analysis is used by investors who are often concerned about the nature and the value of the companies where they trade their stocks in. The holdings are usually short-term since the investors drop the stocks once they reach their projected profit.
The belief that stock prices move in predictable patterns is the basis for technical analysis. The factors that influence the movement of the price are supposedly reflected in the stock market with great efficiency. These factors include company performance, economic status, and natural disasters. The efficiency, when coupled with historical trends, produces movements that can be analyzed and applied to the future movements of the stock market.
Because the fundamental information about the potential growth of a company is not taken into account, technical analysis is not intended for long-term investments. Trades are entered and exited at precise times so technical analysts need to spend a lot of time watching the movements of the stock market. Investors can take advantage of both upswings and downswings in price by going either long or short. In the event that the market doesn’t move as expected, the losses can be limited by stop-loss orders.
Hundreds of stock patterns have been developed over time. Most of these patterns rely on the basic concepts of “support” and “resistance.” The level where downward prices are expected to rise from is called the support while the level where the upward prices are expected to reach before falling again is called the resistance. Once they hit the support or the resistance levels, the prices tend to bounce.
Charts
Technical analysis is heavily reliant on charts for tracking market movements. The most commonly used of these charts are the bar charts. Bar charts contain vertical bars that represent a particular time period. The top part shows the highest price for the period while the bottom part shows the lowest price. There are two small bars in the chart. The small bar in the right indicates the opening price while the small bar in the left indicates the closing price. A large price spread is indicated by long bars. The position of the side bars shows if a price increased or decreased and it also shows the spread between the opening and closing prices.
Candlestick charts are variations on the bar charts. Solid bodies are used by these charts in order to indicate the variation between the opening and closing prices. The lines or shadows that extend above and below the body show the highest and lowest prices. When it comes to the color of the candlestick bodies, black or red represents a closing price that is lower than the previous period while white or green represents a closing price that is higher. The various shapes formed by the candlesticks also describe certain movements in the stock market. A bullish stock, which opened near its low and closed near its high, is represented by a green body with short shadows while a bearish stock, which opened near its high and closed near its low, is represented by a red body with short shadows. There are over twenty different patterns that can be formed by candlesticks.