All About Technical Analysis
Technical Analysis: An Overview
Technical analysis involves looking for patterns and trends in charts to make predictions about the future of a company or stock. Just like fundamental analysis, investors also use technical analysis to select stocks for their portfolio. Technical analysis relies heavily on past market data.
Essentially, indicators are “statistics used to measure current conditions as well as to forecast financial or economic trends.” Some of the most common indicators include support and resistance levels, price trends, chart patterns, volume, and moving averages. I will be including additional information in future posts that will go more in-depth on these indicators.
Candlesticks are a more detailed representation of the price movement of a stock throughout a given time period. Candlesticks are used to represent common intervals such as one minute, five minutes, thirty minutes, one hour, one day, etc.
Here is a diagram to understand the basics of a candlestick:
A red candlestick indicates a downwards price trend, while a green candlestick represents an upwards price trend. There are hundreds, if not thousands, of candlestick patterns to look for in determining price trends. These patterns help determine the best times to buy and sell a stock.
Piecing It Together
Say you are interested in investing in “Company X” and are looking for the best time to purchase its stock. We will be using a moving average line and resistance to make our decision.
Remember, the data in the graph can represent any length of time. It is a common myth that technical analysis is only used for short-term investment making decisions.
By looking at the moving average line in blue, you can see that the company’s stock price continuously decreases and “bounces off” the moving average line and starts moving upwards. This shows that there is resistance at the moving average. In this case, it is likely that a good entry point would be when the price is closest to the moving average line.
Technical analysis is a complex and detailed process that investors continue to utilize when making their investments. By using price and volume data, in addition to other indicators, investors are more easily able to determine strong entry and exit points, and choose stocks for their portfolio. These ideas can be combined with fundamental analysis.