There are many different methods to analyze financial charts, and one of the most popular is technical analysis.
Technical analysis is a method that analyzes the price history of any market to attempt to forecast its future movement. It uses various forms of past data like prices and volume to identify patterns that you can use for trading decisions.
The tools used in technical analysis vary depending on what you’re trying to find. However, there are some basics that everyone should learn first before delving deeper into the field, such as support and resistance levels, trend lines, Fibonacci retracement levels, candlestick formations, price channels and Elliott wave theory.
Price Level
One of the simplest yet least familiar forms of technical analysis is price levels. A price level can be thought of as a “support” or “resistance” level. In other words, when the price reaches a certain area, investors tend to buy or sell at that moment for it to reach higher or lower respectively.
Support Levels
It is the lowest point at which you can sell your stocks before they start dropping even further.
Resistance Levels
They are the highest points at which you can sell your stocks before they start dropping even further.
Parabolic SAR
This indicator is a trend-following momentum indicator that compares the current price of an asset to its past prices by creating two lines; a red line called “Price” and a blue line called “Signal”.
If the price crosses above the signal line, it indicates upward strength in the market. Likewise, if it crosses below the signal line, it indicates downward strength in the market. It also gives you buy and sell signals when the input price is above or below the “Signal” line.
Relative Strength Index
This indicator measures the speed and change of price movements in a security, which helps investors identify whether a trend may be faltering or strengthening. The higher this indicator goes, the more overbought or oversold your asset is from its moving average.
On Balance Volume
This tool looks at the volume when compared to an asset’s price to distinguish between demand and supply. If OBV rises when an asset’s price falls, it typically indicates high selling pressure.
Other Notable Tools
Candlestick Formations
These are the simplest forms of technical analysis. They’re mainly used to predict if an asset’s price is going up or down based on the closing value of the candle. For example, a green candle means that its closing value was higher than its opening value, while a red one means lower.
Trend Lines
These are lines drawn between two points on a chart to identify trends within an asset’s movement. The most popular way by traders is to connect two highs with their lows respectively.
Fibonacci Retracements
These are levels derived from the Fibonacci sequence, a mathematical sequence where each number is approximately 1.618 times greater than the previous number in the sequence. The most popular one is 23.6%, which covers 61.8% of price movements respectively.
Price Channels
These are lines drawn parallel to an asset’s highest highs and lowest lows, creating resistance zones when touched by the current price of an asset on its chart.
Elliott Wave Theory
Ralph Nelson Elliott created this theory to see how mass psychology influences the ebb and flow of financial markets over time.
Because this theory is often used to predict market trends, it is a strong indicator for traders.
Jay Ritter’s study of 2,076 IPOs from 1980-2001 revealed that stocks with names that are easier to pronounce receive a higher price-to-book value ratio.
He, therefore, suggests that investors use “vanity metrics” to determine how much they should pay for shares during the initial public offering (IPO) period.
In December 2013, researchers at Ben Gurion University published results from a study indicating that common stock prices move randomly after the hour when companies release their quarterly reports. The authors concluded that investor confidence increased or decreased based on news about future expectations rather than past fundamentals.
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