Technical Analysis for Beginners – Part 1

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A Beginners’ Guide To Technical Analysis (Part 1)

Seasoned stock traders and veteran investors do not rely mainly on fundamentals to make buy, hold or sell investment decisions when investing in the stock market. In addition to conducting fundamental analysis to determine a stock’s fair value, they also use technical analysis.

What’s the difference?

Fundamental analysis basically centers on the review of financial statements and all related financial and significant non-financial data submitted by publicly-listed companies. Technical analysis involves a statistical review of securities. Both methods are useful guides for investors to make well-informed investment decisions.

What is Technical Analysis?

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By definition, technical analysis is a method by which securities are statistically evaluated based on market activities relative to price and volume. The method does not measure a stock’s monetary value but instead dwells on charts, patterns, and other tools to justify an investment decision.

Users of this method are referred to as technical analysts. The focus of these experts is historical data. They make use of past trading data and information to figure out future price movements. That differentiates them from the other school of thought or the fundamental analysts.

Basic elements of a stock chart

The primary tools for technical analysis are charts. Although charts come in numerous forms, the basic elements are all the same: a) price, b) time, and c) volume for the more detailed charts.

Traders plot the historical data of the stock in review on a graph. When completed, out comes visual representation. Traders are able to see the price movement over a given time frame. A future trajectory can now be made out before confirming a trade.

Source: Investors Underground

Basic assumptions of technical analysis

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  • The market considers ALL factors except price movements

Essentially, technical analysts see price movements as a product of supply and demand for a particular equity that is traded in the market.

Some market experts find fault with technical analysts because they only think through price movements. By ignoring the underlying fundamentals, their investment decisions are error-prone.

As a response to such criticisms, technical analysts argue that all broad factors – financial health, market news, business optimism – are already incorporated in a stock’s price or valuation. That is why they pay no attention to fundamentals. Hence, what is lacking is technical analysis to make the evaluation more detailed and accurate.

  • Price movements establish a trend or pattern

Technical analysts have the confidence to make investment decisions based on price movements, whether in the short, medium, and long-term periods.

They are convinced that the price of a particular stock is likely to carry on from a past trend or establish a pattern. Thus, movements can be anticipated since stocks do not move unpredictably. This assumption is where the technical trading strategy is primarily based on.

  • Past performance is likely to be repeated

Technical analysts believe that the historical performance of stocks will be mirrored in the future. They contend that price movements are repetitive in nature.

Price movements are often market-driven especially with earth-shaking news that could either trigger panic or generate excitement about a certain stock or the market in general.

With technical analysis, these emotions and ensuing market movements can be linked to the chart patterns. It will also result to better understanding of pricing trends. Technical analysts view their approach as the best way to illustrate patterns in price movements, which are recurring in most cases.

THE BEST USES OF TECHNICAL ANALYSIS

The most important doctrine of technical analysis is a trend. Even in the finance realm, the definition of trend is no different from its general meaning. A trend in the stock market pertains to the direction where the market or a stock is heading.

  1. Easy forecasting of price movements based on trends

By using charts, the movement of a market index or a stock price is clearly presented. Therefore, the technical analyst can easily distinguish any of the following trends:

  • Upward
  • Downward
  • Horizontal or Sideways

The upward and downward trends are self-explanatory. The index or stock price can be on an upswing or downswing. The horizontal or sideways trend occurs when there is minimal movement, either up or down in the spike and dip of a trend. Technically speaking, a horizontal trend is actually the non-appearance of any distinct trend in either direction.

2. Easy identification of trend lengths

Apart from direction, the technical analysis also assists the trader to categorize trends according to their length. The duration or period is material because the timing of buying, selling, or holding can be determined based on the trend length.

  • Short-term (one month or less)
  • Medium-term or intermediate term (one to three months)
  • Long-term (longer but can extend beyond one year)

By going deeper into analyzing trends within a period, short-term and medium-term trends may be embedded within a long-term trend. Thus, technical analysts can thoroughly analyze trends by breaking down the charts into periods of one day, five days, one month, one year or a year-to-date basis. They go into precise details in order to arrive at a sound investment decision.

3. Basic illustration

Let us take for example the Straits Times Index (STI), a major stock market index in Asia and the benchmark index for the Singapore stock market. It tracks the performance of the top 30 companies listed on the Singapore Exchange.

The chart below is the One-Year Chart of the STI Index as of January 22, 2020. From the period January 2020 to the current period, the index has been on an upward trend. The index stood at the 3,050 mark from a year ago. Today, the index is at the 3,550.30. The market grew in value by as much 16.4%.

STI Index / One Year Chart

Source: Trading Economics

The direction is generally upward but there are spikes and dips in between periods of the one-year trend. Charts of individual stocks are also available so you can analyse them using technical analysis.

In the chart below, it shows the performance of the STI Index over a five-year period (January 2020 to January 2020). In addition to the one-year trend seen in in the earlier chart, you can now see not just a trend but also a pattern.

STI Index / 5-Year Chart

Source: Trading Economics

Based on the examples above, there are good reasons to rely on technical analysis. Following trends can increase the chances of securing a winning trade. As a caution, even if trends or patterns are recognisable, the method may not be 100% precise. However, developing the skills can lead to a better prognosis of market or stock tendencies.

An important analytical tool

For newbies to the stock market, learning the technical analysis method would be advantageous. You can be more perceptive if you can combine this with your knowledge of fundamental analysis.

Keep in mind that in the stock market, the objective is to realise gains, mitigate risks, and cut losses. Having a basic understanding of technical analysis can shorten every neophyte’s learning curve.

Click here to read the original article.

This is a guest post by ZUU Online, an Asian-based Finance Education Portal aimed at helping individuals to improve their knowledge on personal finance and money, through educational articles on business, investments, property and insurance.

Technical Analysis for Beginners – Part 1

Thanks to the technological development that took place in the last 20 years technical analysis had become more popular than fundamental analysis. That is true for binary options as well, traders using technical analysis on a constant basis. However, most of them do not manage to understand it and make some painful mistakes. In this article, we’ll try to explain some basic concepts of technical analysis and some of the information included here will contradict the one that you already know.

What is technical analysis?

Technical analysis for binary options is basically studying the evolution of price in the past, in order to stop recurring patterns and anticipate the future direction of price. In order to apply successfully the technical analysis principles, you will need a certain mindset.

With technical analysis you will spot some recurring patterns, you will find that the price reacts to some areas in the same way. This brings into discussion support and resistance levels.

What is a support level?

A support level is a place on the chart where buyers had placed their buy order in the past and influenced the price so it started to rise. If you look at any binary option chart, you will find these levels, where buyers had reacted several times.

The key issue on the approach to support levels is that traders see it as a line in the sand. The price won’t react exactly to the level. Sometimes it will pass through it and only then will start to rise. You need confidence when trading binary options and in order to build it, you will need to understand properly what exactly a support level is.

What is a resistance level?

As opposed to a support level, resistance is a level where sellers have placed their orders in the past and that led to a certain price dropping. The same principle applies to resistance levels. You need to see resistance as a zone, not just as a thin line on the chart.

Also, if there are many rejections off a particular level, that makes it stronger, since buyers/sellers had managed to limit the upside/downside.

Hope we managed to help you understand better some key principles of technical analysis- support and resistance levels. Make sure to apply them when trading binary options, as they can really be very effective.

Technical Analysis – A Beginner’s Guide

What is Technical Analysis?

Technical analysis is a tool, or method Valuation Methods When valuing a company as a going concern there are three main valuation methods used: DCF analysis, comparable companies, and precedent transactions. These methods of valuation are used in investment banking, equity research, private equity, corporate development, mergers & acquisitions, leveraged buyouts and finance , used to predict the probable future price movement of a security – such as a stock Stock What is a stock? An individual who owns stock in a company is called a shareholder and is eligible to claim part of the company’s residual assets and earnings (should the company ever be dissolved). The terms “stock”, “shares”, and “equity” are used interchangeably. or currency pair – based on market data.

The theory behind the validity of technical analysis is the notion that the collective actions – buying and selling – of all the participants in the market accurately reflect all relevant information pertaining to a traded security, and therefore, continually assign a fair market value to the security Public Securities Public securities, or marketable securities, are investments that are openly or easily traded in a market. The securities are either equity or debt-based. .

Past Price as an Indicator of Future Performance

Technical traders believe that current or past price action in the market is the most reliable indicator of future price action.

Technical analysis is not only used by technical traders. Many fundamental traders use fundamental analysis Analysis of Financial Statements How to perform Analysis of Financial Statements. This guide will teach you to perform financial statement analysis of the income statement, balance sheet, and cash flow statement including margins, ratios, growth, liquiditiy, leverage, rates of return and profitability. to determine whether to buy into a market, but having made that decision, then use technical analysis to pinpoint good, low-risk buy entry price levels.

Charting on Different Time Frames

Technical traders analyze price charts to attempt to predict price movement. The two primary variables for technical analysis are the time frames considered and the particular technical indicators that a trader chooses to utilize.

The technical analysis time frames shown on charts range from one-minute to monthly, or even yearly, time spans. Popular time frames that technical analysts most frequently examine include:

  • 5-minute chart
  • 15-minute chart
  • Hourly chart
  • 4-hour chart
  • Daily chart

The time frame a trader selects to study is typically determined by that individual trader’s personal trading style. Intra-day traders, traders who open and close trading positions within a single trading day, favor analyzing price movement on shorter time frame charts, such as the 5-minute or 15-minute charts. Long-term traders who hold market positions overnight and for long periods of time are more inclined to analyze markets using hourly, 4-hour, daily, or even weekly charts.

Price movement that occurs within a 15-minute time span may be very significant for an intra-day trader who is looking for an opportunity to realize a profit from price fluctuations occurring during one trading day. However, that same price movement viewed on a daily or weekly chart may not be particularly significant or indicative for long-term trading purposes.

It’s simple to illustrate this by viewing the same price action on different time frame charts. The following daily chart for silver shows price trading within the same range, from roughly $16 to $18.50, that it’s been in for the past several months. A long-term silver investor might be inclined to look to buy silver based on the fact that the price is fairly near the low of that range.

However, the same price action viewed on an hourly chart (below) shows a steady downtrend that has accelerated somewhat just within the past several hours. A silver investor interested only in making an intra-day trade would likely shy away from buying the precious metal based on the hourly chart price action.

Candlesticks

Candlestick charting is the most commonly used method of showing price movement on a chart. A candlestick is formed from the price action during a single time period for any time frame. Each candlestick on an hourly chart shows the price action for one hour, while each candlestick on a 4-hour chart shows the price action during each 4-hour time period.

Candlesticks are “drawn” / formed as follows: The highest point of a candlestick shows the highest price a security traded at during that time period, and the lowest point of the candlestick indicates the lowest price during that time. The “body” of a candlestick (the respective red or blue “blocks”, or thicker parts, of each candlestick as shown in the charts above) indicates the opening and closing prices for the time period. If a blue candlestick body is formed, this indicates that the closing price (top of the candlestick body) was higher than the opening price (bottom of the candlestick body); conversely, if a red candlestick body is formed, then the opening price was higher than the closing price.

Candlestick colors are arbitrary choices. Some traders use white and black candlestick bodies (this is the default color format, and therefore the one most commonly used); other traders may choose to use green and red, or blue and yellow. Whatever colors are chosen, they provide an easy way to determine at a glance whether price closed higher or lower at the end of a given time period. Technical analysis using a candlestick charts is often easier than using a standard bar chart, as the analyst receives more visual cues and patterns.

Candlestick Patterns – Dojis

Candlestick patterns, which are formed by either a single candlestick or by a succession of two or three candlesticks, are some of the most widely used technical indicators for identifying potential market reversals or trend change.

Doji candlesticks, for example, indicate indecision in a market that may be a signal for an impending trend change or market reversal. The singular characteristic of a doji candlestick is that the opening and closing prices are the same, so that the candlestick body is a flat line. The longer the upper and/or lower “shadows”, or “tails”, on a doji candlestick – the part of the candlestick that indicates the low-to-high range for the time period – the stronger the indication of market indecision and potential reversal.

There are several variations of doji candlesticks, each with its own distinctive name, as shown in the illustration below.

The typical doji is the long-legged doji, where price extends about equally in each direction, opening and closing in the middle of the price range for the time period. The appearance of the candlestick gives a clear visual indication of indecision in the market. When a doji like this appears after an extended uptrend or downtrend in a market, it is commonly interpreted as signaling a possible market reversal, a trend change to the opposite direction.

The dragonfly doji, when appearing after a prolonged downtrend, signals a possible upcoming reversal to the upside. Examination of the price action indicated by the dragonfly doji explains its logical interpretation. The dragonfly shows sellers pushing price substantially lower (the long lower tail), but at the end of the period, price recovers to close at its highest point. The candlestick essentially indicates a rejection of the extended push to the downside.

The gravestone doji’s name clearly hints that it represents bad news for buyers. The opposite of the dragonfly formation, the gravestone doji indicates a strong rejection of an attempt to push market prices higher, and thereby suggests a potential downside reversal may follow.

The rare, four price doji, where the market opens, closes, and in-between conducts all buying and selling at the exact same price throughout the time period, is the epitome of indecision, a market that shows no inclination to go anywhere in particular.

There are dozens of different candlestick formations, along with several pattern variations. Probably the most complete resource for identifying and utilizing candlestick patterns is Thomas Bulkowski’s pattern site, which thoroughly explains each candlestick pattern and even provides statistics on how often each pattern has historically given a reliable trading signal. It’s certainly helpful to know what a candlestick pattern indicates – but it’s even more helpful to know if that indication has proven to be accurate 80% of the time.

Technical Indicators – Moving Averages

In addition to studying candlestick formations, technical traders can draw from a virtually endless supply of technical indicators to assist them in making trading decisions.

Moving averages are probably the single most widely-used technical indicator. Many trading strategies utilize one or more moving averages. A simple moving average trading strategy might be something like, “Buy as long as price remains above the 50-period exponential moving average (EMA); Sell as long as price remains below the 50 EMA”.

Moving average crossovers are another frequently employed technical indicator. A crossover trading strategy might be to buy when the 10-period moving average crosses above the 50-period moving average.

The higher a moving average number is, the more significant price movement in relation to it is considered. For example, price crossing above or below a 100- or 200-period moving average is usually considered much more significant than price moving above or below a 5-period moving average.

Technical Indicators – Pivots and Fibonacci Numbers

Daily pivot point indicators, which usually also identify several support and resistance levels in addition to the pivot point, are used by many traders to identify price levels for entering or closing out trades. Pivot point levels often mark significant support or resistance levels or the levels where trading is contained within a range. If trading soars (or plummets) through the daily pivot and all the associated support or resistance levels, this is interpreted by many traders as “breakout” trading that will shift market prices substantially higher or lower, in the direction of the breakout.

Daily pivot points and their corresponding support and resistance levels are calculated using the previous trading day’s high, low, opening and closing prices. I’d show you the calculation, but there’s really no need, as pivot point levels are widely published each trading day and there are pivot point indicators you can just load on a chart that do the calculations for you and reveal pivot levels. Most pivot point indicators show the daily pivot point along with three support levels below the pivot point and three price resistance levels above it.

Fibonacci Retracements

Fibonacci levels are another popular technical analysis tool. Fibonacci was a 12 th -century mathematician who developed a series of ratios that is very popular with technical traders. Fibonacci ratios, or levels, are commonly used to pinpoint trading opportunities and both trade entry and profit targets that arise during sustained trends.

The primary Fibonacci ratios are 0.24, 0.38, 0.62, and 0.76. These are often expressed as percentages – 23%, 38%, etc. Note that Fibonacci ratios complement other Fibonacci ratios: 24% is the opposite, or remainder, of 76%, and 38% is the opposite, or remainder, of 62%.

As with pivot point levels, there are numerous freely available technical indicators that will automatically calculate and load Fibonacci levels onto a chart.

Fibonacci retracements are the most often used Fibonacci indicator. After a security has been in a sustained uptrend or downtrend for some time, there is frequently a corrective retracement in the opposite direction before price resumes the overall long-term trend. Fibonacci retracements are used to identify good, low-risk trade entry points during such a retracement.

For example, assume that the price of stock “A” has climbed steadily from $10 to $40. Then the stock price begins to fall back a bit. Many investors will look for a good entry level to buy shares during such a price retracement.

Fibonacci numbers suggest that likely price retracements will extend a distance equal to 24%, 38%, 62%, or 76% of the uptrend move from $10 to $40. Investors watch these levels for indications that the market is finding support from where price will begin rising again. For example, if you were hoping for a chance to buy the stock after approximately a 38% retracement in price, you might enter an order to buy around the $31 price level. (The move from $10 to $40 = $30; 38% of $30 is $9; $40 – $9 = $31)

Fibonacci Extensions

Continuing with the above example – So now you’ve bought the stock at $31 and you’re trying to determine a profit target to sell at. For that, you can look to Fibonacci extensions, which indicate how much higher price may extend when the overall uptrend resumes. The Fibonacci extension levels are pegged at prices that represent 126%, 138%, 162%, and 176% of the original uptrend move, calculated from the low of the retracement. So, if a 38% retracement of the original move from $10 to $40 turns out to be the retracement low, then from that price ($31), you find the first Fibonacci extension level and potential “take profit” target by adding 126% of the original $30 move upward. The calculation goes as follows:
Fibonacci extension level of 126% = $31 + ($30 x 1.26) = $68 – giving you a target price of $68.

Once again, you never actually have to do any of these calculations. You just plug a Fibonacci indicator into your charting software and it displays all the various Fibonacci levels.

Pivot and Fibonacci levels are worth tracking even if you don’t personally use them as indicators in your own trading strategy. Because so many traders do base buying and selling moves on pivot and Fibonacci levels, if nothing else there is likely to be significant trading activity around those price points, activity that may help you better determine probable future price moves.

Technical Indicators – Momentum Indicators

Moving averages and most other technical indicators are primarily focused on determining likely market direction, up or down.

There is another class of technical indicators, however, whose main purpose is not so much to determine market direction as to determine market strength. These indicators include such popular tools as the Stochastic Oscillator, the Relative Strength Index (RSI), the Moving Average Convergence-Divergence (MACD) indicator, and the Average Directional Movement Index (ADX).

By measuring the strength of price movement, momentum indicators help investors determine whether current price movement more likely represents relatively insignificant, range-bound trading or an actual, significant trend. Because momentum indicators measure trend strength, they can serve as early warning signals that a trend is coming to an end. For example, if a security has been trading in a strong, sustained uptrend for several months, but then one or more momentum indicators signals the trend steadily losing strength, it may be time to think about taking profits.

The 4-hour chart of USD/SGD below illustrates the value of a momentum indicator. The MACD indicator appears in a separate window below the main chart window. The sharp upturn in the MACD beginning around June 14 th indicates that the corresponding upsurge in price is a strong, trending move rather than just a temporary correction. When price begins to retrace downward somewhat on the 16 th , the MACD shows weaker price action, indicating that the downward movement in price does not have much strength behind it. Soon after that, a strong uptrend resumes. In this instance, the MACD would have helped provide reassurance to a buyer of the market that (A) the turn to the upside was a significant price move and (B) that the uptrend was likely to resume after price dipped slightly on the 16 th .

Because momentum indicators generally only signal strong or weak price movement, but not trend direction, they are often combined with other technical analysis indicators as part of an overall trading strategy.

Technical Analysis – Conclusion

Keep in mind the fact that no technical indicator is perfect. None of them gives signals that are 100% accurate all the time.

The smartest traders are always watching for warning signs that signals from their chosen indicators may be misleading. Technical analysis, done well, can certainly improve your profitability Profitability Ratios Profitability ratios are financial metrics used by analysts and investors to measure and evaluate the ability of a company to generate income (profit) relative to revenue, balance sheet assets, operating costs, and shareholders’ equity during a specific period of time. They show how well a company utilizes its assets to produce profit as a trader. However, what may do more to improve your fortunes in trading is spending more time and effort thinking about how best to handle things if the market turns against you, rather than just fantasizing about how you’re going to spend your millions.

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