Intro to Market Analysis

Understand Dow's Theories Used in Technical Analysis

Market fluctuations are a reflection of all known information. This means that the price of a security and its trade performance can be seen in the information available about it. Price listings are viewed as a fair value. Major news about a company often leads to a sudden change in how its stock trades. 

Price movements can be charted and predicted. Although prices tend to move randomly, there are times when they move in a noticeable trend. Identifying the trend makes it possible to make money from it. According to the period the market is analyzed, short and long term trends become easy to identify.   

History often repeats itself. Traders react the same way to current conditions the same way they do to past ones. This predictable behavior in people allows technical analysts to profit each time similar conditions occur.   

Read Charts

How to Use Charts the Right Way!

Chart reading can allow you to spot price trends. By studying charts and graphs, you can identify the general direction the prices are headed while overlooking individual fluctuations. Different kinds of trends include up trends, down trends, horizontal trends, trend lines and major trends. Major trends are those that last more than an year.   

There are four kinds of charts used by technical analysts. Line charts are used to plot closing stock prices over a few years. Candlestick and bar charts are used to show high and low prices for a particular trading period and any gaps experienced between trading periods. Point and figure charts show significant price movements experienced over a long time.

A cup-shaped pattern indicates an upward trend that will continue after a short pause in the downward direction. Saucer bottom or rounding bottom pattern signifies long-term bottoming after a downtrend which then moves to an upswing. Double top or double bottom patterns show two failed attempts at exceeding a high or low price followed by a trend reversal. Other patterns observed include wedges, flags, pennants, and triangles.   

Support and Resistance

Support is the lowest price a security drops to before more buyers drive the price up while resistance is the highest price attained by a security before the owner sells their share causing the price to fall again. These levels fluctuate from time to time. Technical analysts tend to keep away from securities nearing a support level due to the volatility of the price.

It's possible for stock prices to fall below support levels or rise above resistance levels. In such cases, the support level becomes a resistance lever for a new low-level support and vice versa. Such reversals are usually common in the short term.   

The Volume of Trade

The amount of buying and selling going on indicates the validity of a trend. An increase in trading volume rises while the price is rising indicates a valid trend. If the trading volume increases slightly or falls while the price goes up, the trend might reverse itself soon.

Use Moving Averages

A moving average is defined as a series of calculated averages calculated over equal periods of time. It's used to filter out minor price fluctuations. They make it easier to see overall trends since they remove unrepresentative highs and lows.

The simple moving average (SMA) is calculated by adding all closing prices during a particular time period and dividing it by the number of prices included.

The linear weighted average takes each price in the chart and multiplies it by its position before adding all the prices and dividing them by the number of prices.

Exponential moving average (EMA) is similar to the linear moving average. The only difference is that it weighs the most recent prices to compute the average. This makes it more responsive to the most recent information.

Indicators and Oscillators

Indicators are calculations that usually support trend information drawn from price movements. Some indicators have a particular value range and are called oscillators.

We have leading and lagging indicators. Leading indicators predict price movements and are used in horizontal trends to show uptrends or downtrends. Lagging indicators are used to confirm price movement.

The average directional index (ADX) and the Aroon indicator are included in trend indicators. ADX uses negative and positive directional indicators to find out the strength of an uptrend or downtrend on a scale 0 - 100 with values less than 20 showing a weak trend and those above 40 showing a strong one. The Aroon indicator determines the nature and strength of a trend and the onset of a new one.   

Moving average convergence-divergence (MACD) indicator is the best-known volume indicator. It shows the difference between two moving averages, a long-term and a short-term plotted against a center line representing the where the two averages are equal.

On-balance (OBV) indicator is another volume indicator that shows the total trading volume within a given period. If the value is a positive number, the price is up but if its negative, the price is down.

It's not a good practice to use indicators and oscillators alone to help you decide on whether to buy or sell. The best thing is to use them together with other methods such as chart patterns and price movements.

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Market analysis using technical analysis focuses on short periods of time usually a few minutes to one month. This makes it suitable to people seeking to make money by repeatedly buying and selling securities rather than investing them for a long period of time. You might want to read some tips on "How to be Successful in Day Trading".