Technical Analysis
Technical analysis is the art and science of examining
stock chart data and predicting future moves on the stock market. Investors
who use this style of analysis are often unconcerned about the nature
or value of the companies they trade stocks in. Their holdings are usually
short-term – once their projected profit is reached they drop
the stock.
The basis for technical analysis is the belief that
stock prices move in predictable patterns. All the factors that influence
price movement – company performance, the general state of the
economy, natural disasters – are supposedly reflected in the stock
market with great efficiency. This efficiency, coupled with historical
trends produces movements that can be analyzed and applied to future
stock market movements.
Technical analysis is not intended for long-term
investments because fundamental information concerning a company's potential
for growth is not taken into account. Trades must be entered and exited
at precise times, so technical analysts need to spend a great deal of
time watching market movements.
Investors can take advantage of both upswings and
downswings in price by going either long or short. Stop-loss orders
limit losses in the event that the market does not move as expected.
There are many tools available to the technical
analyst. Literally hundreds of stock patterns have been developed over
time. Most of them, however, rely on the basic concepts of 'support'
and 'resistance'. Support is the level that downward prices are expected
to rise from, and Resistance is the level that upward prices are expected
to reach before falling again. In other words, prices tend to bounce
once they have hit support or resistance levels.
Charts
Technical analysis relies heavily on charts for
tracking market movements. Bar charts are the most commonly used. They
consist of vertical bars representing a particular time period –
weekly, daily, hourly, or even by the minute. The top of each bar shows
the highest price for the period, the bottom is the lowest price, and
the small bar to the right is the opening price and the small bar to
the left is the closing price. A great deal of information can be seen
in glancing at bar charts. Long bars indicate a large price spread and
the position of the side bars shows whether the price rose or dropped
and also the spread between opening and closing prices.
A variation on the bar chart is the candlestick
chart. These charts use solid bodies to indicate the variation between
opening and closing prices and the lines (shadows) that extend above
and below the body indicate the highest and lowest prices respectively.
Candlestick bodies are coloured black or red if the closing price was
lower than the previous period or white or green if the price closed
higher. Candlesticks form various shapes that can indicate market movement.
A green body with short shadows is bullish – the stock opened
near its low and closed near its high. Conversely, a red body with short
shadows is bearish – the stock opened near the high and closed
near the low. These are only two of the more than 20 patterns that can
be formed by candlesticks.
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