Your comprehensive guide to understanding the world of stock trading
Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Unlike fundamental analysis, which focuses on a company's financials, technical analysis assumes that all relevant information is already reflected in the price and that historical patterns tend to repeat themselves.
A basic chart that shows the closing price of a security over time. Line charts are simple and provide a clear view of the overall trend.
Shows the open, high, low, and close (OHLC) for each trading period. Each vertical line represents the range from high to low, with horizontal lines indicating the open and close prices.
Similar to bar charts but more visually intuitive. Each candlestick shows the open, high, low, and close prices. The body of the candlestick is filled or hollow depending on whether the close was higher or lower than the open.
Focuses on price changes without regard to time. It uses X's and O's to represent price movements above or below certain thresholds.
Technical indicators are mathematical calculations based on a security's price and/or volume. They are used to identify patterns and trends in the market.
Calculates the average price over a specific period. Common types include Simple Moving Average (SMA) and Exponential Moving Average (EMA).
Use: Identify trend direction and potential support/resistance levels.
Measures the speed and change of price movements on a scale of 0-100.
Use: Identify overbought (above 70) and oversold (below 30) conditions.
Compares two moving averages of a security's price.
Use: Identify trend changes and momentum shifts.
Consists of a middle band (SMA) and upper/lower bands that are standard deviations away from the middle band.
Use: Identify volatility and potential overbought/oversold conditions.
Measures the number of shares traded during a given period.
Use: Confirm the strength of a price move.
Compares a security's closing price to its price range over a given period.
Use: Identify overbought/oversold conditions and potential trend reversals.
Chart patterns are distinctive formations created by the price movements of a security. They are used to predict future price movements based on historical patterns.
A bearish reversal pattern consisting of a peak (head) between two lower peaks (shoulders). It signals that an uptrend may be reversing.
A double top is a bearish reversal pattern where the price reaches two similar highs. A double bottom is a bullish reversal pattern where the price reaches two similar lows.
Formed when the price consolidates between converging trendlines. Can be ascending, descending, or symmetrical.
Short-term continuation patterns that form after a sharp price movement. Flags are rectangular, while pennants are triangular.
Support is a price level where a downtrend is expected to pause due to a concentration of demand. Resistance is a price level where an uptrend is expected to pause due to a concentration of supply.
Technical analysis can be applied to various time frames, from minutes to years. Different traders use different time frames based on their trading style:
| Time Frame | Trading Style | Description |
|---|---|---|
| 1-minute to 1-hour | Scalping | Very short-term trades, holding positions for minutes |
| 1-hour to daily | Day Trading | Opening and closing positions within the same trading day |
| Daily to weekly | Swing Trading | Holding positions for several days to weeks |
| Weekly to monthly | Position Trading | Holding positions for weeks to months |
| Monthly to yearly | Long-term Investing | Holding positions for months to years |
While technical analysis can be a powerful tool, it's important to be aware of its limitations: