Technical Analysis of Stocks and Trends

Introduction

Every year, millions of young minds enter the stock markets to try their luck and become millionaires. Have you ever thought about what is the one thing that separates the few people getting the Midas touch in the stock markets from people who crashed down their entire capitals and exited the market? It is knowledge, perseverance and devotion. 

Let’s talk about knowledge. The knowledge in the stock market field can be bifurcated into fundamental analysis of stocks and technical analysis of stocks. 

In this blog, we will discuss what is a technical analysis of blogs and related things. 

Let us quickly understand what is the technical analysis of stock trends.

What is Technical Analysis of stocks?

The technical analysis of stock trends is nothing but the study of markets including predicting the price trends as well as various patterns as seen on the stock charts. With the help of technical analysis, you can predict future price movements, which helps the stock traders to make a profit. 

Let us understand this in more simple terms. Technical analysis is the trading and profit-making opportunities by analyzing the patterns seen on stock market charts. Performing the stock market technical analysis helps the traders and investors make strategies as well as identify points of entry plus exit.  

Now, let us understand what are the important elements of technical analysis.

The important elements of technical analysis.

When a person starts trading/investing in the stock market, he needs 4 elements. These are 

  1. Trends 
  2. Patterns
  3.  Indicators 
  4. Entry Signals

Let us quickly understand all four of these. 

Trends

A trend is nothing but the most basic and prominent element of Technical Analysis. The trend suggests a particular direction in which the stock is moving. It simply tells you which way the stock is currently moving. It is pertinent to note that the stock can move in upward, downward, or sideward ways. 

Any person who has even a minute understanding of technical Analysis knows the following basic rule of the Stock Market. 

“The trend is your friend.” 

 The above line suggests that if you are trading according to the prevalent trend that the stock has adopted, there are high chances of being successful.  

Pattern

Any pattern or a picture in a particular stock can only be made once the different levels(namely trends support, and resistance) have been drawn.  The interception of these levels forms different patterns which can be studied to understand what action is the stock doing so as to determine the next steps that it would take.  

Indicators

Indicators are formulas and ratios that try to interpret and understand the index data in order to predict the subsequent market movements.  Commonly known indicators are moving averages, balance volume, market breadth and market sentiments.  

Studying these indicators helps you understand whether the ongoing trend will continue or will go in reverse. The indicators also help the traders make decisions regarding their entry as well as exit points.

Entry Signals

The entry signals in the forex represent the level or the price where the trader makes a trade. A good entry point is often the most important aspect of any stock market trade. Investors take the help of trendlines, moving averages and several other indicators and variables to determine suitable entry points.

 Let us now talk about some commonly used tools for technical analysis of stocks

Candlestick Patterns

A candlestick is a technical trading tool and is a key component in stock market analysis. The candlesticks taken together make a pattern which has been used for centuries to deduce the price direction that a particular stock would take. 

Candlesticks usually make different patterns which help the traders and investors determine the short-term directions of the stock. Hence, it helps them make effective trading decisions.  

It must be noted that trading is guided by different emotions. These emotions can be well read by using candlestick charts.   

When candlesticks are taken together for a certain period of time, they form a candlestick pattern. The candlestick pattern shows the price movement represented graphically which can determine the price movement of stocks. There are various candlestick patterns known as the inverse hammer, bullish engulfing, piercing line, morning star, shooting star, bearish engulfing etc. 

Moving Averages

The moving average is one of the most crucial stock indicators used for technical analysis. Moving averages are extremely helpful in calculating the trends of a particular stock or understanding the different resistance and support levels. Moving averages are determined by calculating by adding up all the data points measured during a certain period of time which are then divided by the sum of all the time periods.

The most popular moving averages are 10 days, 20 days, 50 days, 100 days and 200 days. 200-day moving averages are considered most reliable by the traders as they tell you the direction that the market would be taking during a long period of time.  

Support and Resistance

The resistance level is a point where a particular stock stops rising further and is expected to start its downward journey. Resistance is one of the most crucial aspects for traders and investors and it often acts as a trigger for initiating a sell.  In layman’s terms, resistance is the point/level where the supply is extremely strong and thus, it stops the stock from moving any higher.   

For example, a stock was moving upwards as it was in an uptrend. Suddenly, it started taking a reversal and started moving downwards. In this example, the point where the reversal begins is the strong resistance level for the stock.  

Support is one of the most important points and is just the reverse of resistance. A support level is a point on the trading charts which prevents the stock from falling further. Traders usually draw a support line for the stocks to ascertain the points where the stock is likely to bounce back. It must be noted that the support level is the price point where the traders/investors get triggered to buy.   The investors/traders expect maximum demand on the support level and the same is always lower than the current prevailing market prices.  

Conclusion

These technical tools can help one develop an investment methodology when trading in the stock markets. These indicators can help you find the probable future price moments. But it goes without saying that the markets may be subjected to unusual price movements and it is always advisable to trade with caution.

 

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