The stock market theories of Charles Henry DOW, the founder of the Wall Street Journal, evolved into technical analysis.Technical analysis attempts to predict the future price of stocks, commodities, futures and other tradeable securities based on past prices and performance.Technical analysts apply the law of supply and demand to understand how the stock market and other securities exchanges work.Technical analysis can be used to choose stocks and other commodities.
Step 1: Understand how technical analysis is done.
The technical analyst's approach to financial markets is influenced by three theories of investments by the man.There is an explanation of how technical analysts interpret those theories.All known information is reflected in the market fluctuations.Technical analysts believe that changing the price of a security and how well it trades in the market reflect all the available information about that security.The price listings are thought of as fair value.Major news about the company that issued the stock is usually preceded by sudden changes in how a stock trades.Technical analysts do not care about the price-to-earnings ratio, shareholder equity, return on equity or other factors that fundamental analysts consider.Predicting and calculating price movements can be done.There are periods when prices move randomly, but there are also times when they move in a trend.Once a trend is identified, it is possible to make money by either buying or selling during an upward or downward trend.It is possible to spot both short- and long-term trends by adjusting the length of time the market is being analyzed.It repeats itself.People don't change their motives overnight, traders can expect to react the same way they did in the past.Technical analysts can use their knowledge of how other traders reacted in the past to profit when conditions repeat themselves.Technical analysis differs from efficient market theory in that it ignores the effect that human actions have on the market.
Step 2: Look for fast results.
Technical analysis focuses on periods no longer than a month and sometimes as short as a few minutes, unlike fundamental analysis which looks at balance sheets and other financial data over a long period of time.It's suited to people who want to make money from securities by buying and selling them often rather than investing for the long term.
Step 3: Spot price trends by reading charts.
Technical analysts look at charts and graphs to spot the general direction in which security prices are headed.Up trends are characterized by highs and lows that become higher over time.Down trends can be seen when highs and lows are lower.There are horizontal trends in which highs and lows don't change much from before.The trend lines are drawn to connect the highs and lows.It makes spotting trends easy.channel lines are trend lines.When trends last longer than a year, they are classified as major trends, intermediate trends and near-term trends.Major and minor trends are made up of near-term and intermediate trends, which may not go in the same direction as the larger trend they are part of.A month-long downward price correction in a bull market is an example.The bull market is a major trend, while the price correction is an intermediate trend.Technical analysts use a lot of charts.Line charts are used to plot closing stock prices over a period of time, bar and candlestick charts to show the high and low prices for the trading period (and gaps between trading periods if there are any), and point and figure charts.Technical analysts come up with phrases for patterns that appear on the charts.A pattern resembling a head and shoulders indicates that a trend is about to change.After pausing for a short downward correction, a pattern resembling a cup and handle indicates that an upward trend will continue.A saucer bottom pattern indicates a long-term bottoming out of a downward trend.A double top or double bottom pattern indicates two failed attempts to exceed a high or low price, which will be followed by a reversal of the trend.There are three failed attempts that precede a trend reversal.Other patterns include flags and wedges.
Step 4: Understand the concepts of support and resistance.
The lowest price a security reaches before more buyers come in is called support.The highest price a security reaches before owners sell their shares causes the price to fall again.The levels are not fixed.The bottom line of the chart is the floor price for the security, while the top line is a resistance line.When the trend reverses itself, support and resistance levels are used.Support and resistance prices are often given in round numbers because people tend to think in those numbers.Stock prices can fall below support levels or rise above resistance levels.The support level may become a resistance level for a new, higher level.The price needs to change for this to happen.It is possible that reversals will be common in the short term.Technical analysts tend to avoid buying securities when they are close to a support level.They can buy within a few points of that level.The support price is used as a trading point by those who sell short.
Step 5: The volume of trades should be watched.
The validity of a trend or whether it's reversing itself is determined by how much buying and selling goes on.The trend is valid if the trading volume increases even as the price increases.If the price goes up and the trading volume goes down, the trend is likely to reverse itself.
Step 6: Minor price fluctuations can be Filters out by using moving averages.
A moving average is a series of calculated averages.It's easier to see trends when moving averages remove highs and lows.It is easier to spot trend reversals when you plot prices against moving averages.Adding together all the closing prices during the time period and dividing that sum by the number of prices included is the simple moving average.The linear weighted average takes each price and divides it by the number of prices on the chart.The first price would be increased by 1, the second by 2, the third by 3 and the fourth by 4.The most recent prices used in computing the average make theEMA more responsive to the latest information than the simple moving average.
Step 7: If you want to know what the price movements are telling you, use indicators and oscillators.
You can add another factor into your decision to buy or sell securities by using indicators.An example of an indicator is the moving averages described above.Some indicators can have any value, while others are restricted to a specific range of values.The latter indicators are called oscillators.There are indicators that are either leading or lagging.During horizontal trends, leading indicators are most useful.Lagging indicators can be used to confirm price movements.The average Directional index and the Aroon indicator are trend indicators.Positive and negative indicators are used to determine how strong an uptrend is on the scale of 0 to 100.A weak trend and a strong one can be seen with values below 20.The Aroon indicator plots the lengths of time since the highest and lowest trading prices were reached, using that data to determine the nature and strength of the trend or the beginning of a new trend.The moving average convergence-divergence indicator is the best volume indicator.It is the difference between two moving averages, one short-term and the other long term, which is plotted against a center line.The market should move upward if the short-term average is above the long term average.The market is moving downward because the short-term average is below the long term average.When the line of the MACD crosses the centerline, it shows when the moving averages make it cross over.TheOBV is the total trading volume for a given period, a positive number if the price is up and a negative number when it is down.The value of the number has less meaning than whether it is positive or negative.The relative strength index is used to track how frequently securities are traded.A value over 70 indicates that the security being evaluated is being bought too frequently, while a value under 30 indicates it's being sold too often.RSI can be used for shorter periods making it more volatile.The oscillator runs from 0 to 100.It indicates too frequent buying and selling at values under 20.