Technical analysis is like playing chess. You see the end of the game once you make the right investment decision. A winning portfolio is essential for you to make profits. Thus, conducting a technical analysis will give you an upper hand in deciding to buy, sell, or hold a stock.
Why Technical Analysis?
Technical analysis provides a graphical analysis of the behavior of a stock or market index. Data generated from the market includes:
- The momentum of prices for a span of time
- Turning points prices in the past, and future
- The volume of stocks bought and sold every day.
- Technical analysis primarily tracks the actions of large institutional investors. The size of their transactions allows more visibility.
A stock market investment decision can be risky. Why? Because the investor has no idea when the market may fluctuate. By using technical analysis tools, investors have a better chance to predict the future stock price movements.
Conducting a technical analysis helps stock investors to identify:
- Instabilities of particular stocks either in the past or present
- Historical trading levels and volumes of different stocks
- Stock’s value and ability compared to the whole stock market
- The effects of important events on stock value and price fluctuations
- Resistant and support levels in the market
- The best time to enter the market
Before entering or exiting a stock market, you should first understand technical indicators. Technical indicators are calculations applied to a stock’s past prices, volumes or patterns. They help to alert investors of stock trends and predict the direction of future prices.
Technical indicators can either be leading or lagging. The former informs investors when a trend is about to start, and the latter follows the price action. Some of these technical indicators include Momentum indicators, Volume indicators, Trend Indicator, Volatility indicators.
- Trend Indicator: These indicators measure the strength and direction of a trend. It uses averaging price mechanism to establish a baseline. When the prices move above the average that is considered an upward trend. Vice versa is a downward trend. Moving averages, moving average convergence divergence, parabolic stop and reverse are the most popular indicators.
- Momentum indicators. These indicators act as a guide in identifying the speed of price movements. The mechanism used is the calculation of current and previous closing prices. Stochastic oscillators, commodity channel index, and relative strength index are the most popular indicators.
- Volatility indicators. These indicators measure the rates of price movements irrespective of the direction. The mechanism used is the consideration of the lowest and highest historical prices. Bollinger bands, true average range, and standard deviation are the most popular indicators.
- Volume indicators. These indicators confirm or measure the strength of a trading trend. It is based on smoothing or averaging of raw volumes. Large price movements are usually influenced by trading volume increase. Chaikin oscillator, on-balance volume, and volume rate of change are the most popular indicators.
Learn About the Stock Market
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