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Technical Analysis in Stock Market

In stock market, technical analysis is a procedure or technique to determine the future movements of a stock. Generally, technical analysis provides a belief that the buying and selling of a particular stock will reflect all important information related to it. Consequently, this helps in setting a fair value for the security in the market.

Technical analysts consider the past and current price levels as the most efficient indicator for future price. Not only technical traders use technical analysis. Other traders also use this to identify best and low-risk stocks.

TIME FRAMES IN TECHNICAL ANALYSIS

Traders study the price charts to predict price movements. There are two main factors in technical analysis. Firstly, the considered time frames. Secondly, the indicators that you pick to use. The time frames in technical analysis vary from minutes to yearly time span. Most frequently used time frames include 5-min chart, 15-min chart, 4-hour chart, daily chart.

You can choose the time frame according to your trading method. Normally, Intra-day traders open and close positions within a trading day. Such traders prefer shorter time charts like 5-min or 15-min charts. Long-term traders generally hold trading positions for a long time. Such traders prefer longer time frame like hourly or weekly charts. Price changes within a 5-min time span could be very important for an intra-day trader. You could find profit from the price shifts during that time. But, this wouldn’t particularly help the long-term traders.

CANDLESTICK CHARTING

Candlestick charting generally shows the price movements on a chart. Each candlesticks shows the price action of that particular time frame. For example, the candlestick for hourly chart displays the action  for one hour. Similarly, a 4-hour chart candlestick shows the price action for 4-hours time period. The top point of a candlestick represents the peak price traded in that specific time period. Likewise, the bottom most point of candlesticks represents the minimum price. Therefore, a candlestick can display the closing and opening prices.

The default color format of candlesticks is black and white. Some traders use other colors like blue, yellow, green or red. Generally, the formation of a red candlestick indicates that the opening price was larger than closing price. Conversely, a blue candlestick shows that the opening price was lesser than the closing price. Use of candlesticks is the more easier way in technical analysis.

Some of the most extensively used technical indicators for understanding trend change include patterns formed by a single candlestick or the sequence of two or three candlesticks. For example, Doji candlesticks express the indecisions in the market. This could be an indication for trend reversals or trend changes. There are various variants for Doji candles:

Doji variants
Doji variants

After the extended uptrend or downtrend, the appearance of Long legged Doji generally indicates a market reversal. Gravestone Doji indicates the chance of downside reversal. Dragonfly Doji indicates the chance of upside reversal. Four price Doji, the rarest candle indicates particularly no inclination for any reversal.

MOVING AVERAGES

Moving average gives you the average price of a stock over a particular time period. This is generally used as a technical indicator. These averages can also operate as assistance and resistance ranges. But it doesn’t provide the actual buying and selling levels.

There are two types of moving averages: Simple Moving Average(SMA) and Exponential Moving Average(EMA). There are many methods to effectively use moving averages.

PIVOT POINT INDICATORS

Generally, many traders use pivot point indicators for identifying price levels for opening and closing trades. These indicators specifies important resistance and support levels. There are breakouts, which is the rapid increase or decrease of trade over the daily pivot. When this happens, the market prices will increase or decrease accordingly. Daily pivot points as well as the support and resistance levels are determined through the previous day’s low, high, opening and closing prices. Most of these indicators show daily pivot points and three support and three resistance levels.

FIBONACCI LEVELS

Fibonacci level is one of the other most commonly used technical analysis tools. For continuous trends, Fibonacci levels or ratios point out the best trading opportunities along with profit targets. One of the most widely used Fibonacci indicator is Fibonacci Retracement. When a security stays in a continuous downtrend or uptrend, there is always a rectifying retracement in the opposite direction. During such retracements, these indicators show the best, low-risk trading points.

MOMENTUM INDICATORS

Momentum indicator is another category of technical indicators which determines the market strength. These indicators identifies the price movement strengths and determines whether the current price represents a significant or non-significant trend. These can sense the ending of the current trend and thus help traders as an early warning. Some of the popular tools in this category are MACD(Moving Average Convergence Divergence), ADX(Average Directional Movement Index), RSI(Relative Strength Index) and Stochastic Oscillator.

CONCLUSION

None of the technical indicators are 100% accurate. Investors should know how to use every indicators at its best. You should be observant and careful while taking trading decisions.

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