Technical analysis of stock trends refers to the study of historical market data, including volume and price from which you can gain an understanding of trend direction and strength.
It adopts both quantitative analysis and behavioral economics to predict future market behavior using past performance. Technical analysis describes a trading discipline adopted to identify trading opportunities and evaluating investments.
This is done by analyzing statistical trends that are acquired from activities of the trade, such as price volume and movement. Such methodology fosters selling and buying decisions using this information while implementing risk management techniques to protect positions.
Thought nugget: Statistical (technical) indicators and chart patterns are the most common forms of technical analysis.
Why technical analysis?
Notably, technical analysis emphasizes the examination of trading history and price charts to decide the future price movements and makes assumptions that:
- Prices of securities move in trends
- Demand and supply govern the cost of any security
- Personal perceptions influence price movements
Technical Analysis of Stock Trends – How it works
To succeed in this research, investors begin with charts that point out the trading volume history and price of a specific index or security. Additionally, this methodology shows other statistical measures, for instance, percentage changes, minimums and maximums. The concept is to incorporate charts to determine trends and changes. Additionally, technical analysis is implemented to check the possible continuation of the current trend.
Does technical analysis matter? Yes, it does. Unlike fundamental analysis that concentrates on establishing a security’s actual value by scrutinizing macroeconomic events, competition, market outlooks and financial statements, the technical evaluation focuses on the fact that past trends in the market can envisage present behavior for individual stocks and the market at large.
Accurate interpretation of charts message and prediction of stock movements can earn investors a lot of money. However, specific aspects of technical analysis are debatable; for instance, the belief that markets and stocks move in viable trends over a long time, and the recognition that market action can identify shifts in demand/supply relationships.
Adoption of technical indicators and chart patterns
Technical indicators are mathematical calculations centered on open interest, volume, or price of a contract or security adopted by effective traders who are keen on technical analysis. They are crucial in analyzing historical data to project future price movements. The two common types of technical indicators are:
- Overlays – These are statistics that utilize an exact scale; prices are plotted on top of costs on a chart.
- Oscillators – These values fluctuate between a local maximum and minimum, and are mapped out below or above a price chart.
It is worth noting that an array of technical indicators is often incorporated when assessing a security. Of significant consideration is that amidst numerous options, traders should settle on the most suitable signs and get accustomed to how they work. Also, sellers may merge technical indicators with other forms of technical analysis, for example, chart patterns to achieve trade ideas. These indicators can also be combined into automated systems of trade given their quantitative character.
Chart patterns are unique formations generated on a chart by the movements of security prices. They are characterized by lines that connect common price points, for example, highs or lows and closing prices, during a specific time frame.
Analysts strive to identify patterns as a channel of projecting the future direction of the price of a security. These patterns are based extensively on trend lines drawn on a chart to point out resistance and support levels. A resistance line refers to the level in which the stock price seems to have difficulty moving above while a support line refers to a degree in which the stock appears to have difficulty penetration below. The two major categories of chart patterns are:
- Reversal patterns – These depict higher chances that the present trend has come to an end and a reverse direction will ensue.
- Continuous patterns – These indicate increased prospects for the progression of the existing trend. They are retracements or momentary consolidation within the trend.
- The technical analysis of trends and stocks strives to forecast future movements of price, offering traders with the required information to make a profit.
- The application of specialized tools by traders fosters the identification of points of entry and exit for potential trading opportunities. A chart formation may depict a point of entry for a short seller; nonetheless, the trader will view moving averages for various time frames.
- An essential assumption of the technical analysis of trends and stocks is that the market processes all information, an aspect reflected in the pricing chart.