Learn Stocks Technical Analysis

Learn Basic Stocks Technical Analysis

Technical Analysis is the study of market action through the use of charts for forecasting future price trends. The market action is defined by several parameters like market price, volume, open interest and market breadth. Technical analysis does not look at the company’s financial performance and its future earning potential. Technical analysis is based on the concept of trends. The main idea of technical analysis is to forecast future prices on the basis of identification of trends that exist in the market at any given point of time.
Moving Averages

A moving average indicates the average price of a security over a certain period of time. There are four types of moving averages: Simple, Exponential, Smoothed and Linear Weighted. The most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).

Simple Moving Average (SMA)

Simple Moving Average is calculated by summing up all the past closing prices over the time period and divides the result by the number of time period. For example, in a 50-day moving average, the last 50 closing prices are added together and then divided by 50.

Exponential Moving Average (EMA)

Exponential Moving Average gives more weightage on recent prices relative to older prices. The weightage applied to the most recent price depends on the time period of the moving average. The shorter the EMA’s period, the more weight will be applied to the most recent price.

Moving Averages helps to identify the direction of the trend. If the moving average is rising, the trend is considered up. If the moving average is declining, the trend is considered down. It also helps to identify support and resistance levels of a particular security.

Relative Strength Index

Relative Strength Index (RSI) compares the upward price movement to downward price movement over a specific time period. This result is displayed in an oscillation momentum ranging 0-100. RSI measures speed and change of price movements. This is used as a trading indicator in the technical analysis.

RSI can be used to identify an overbought level when the range is above 70 and oversold level when it is below 30.The RSI tops at 70 level and bottoms at a level of 30.

Bollinger Bands

Bollinger Bands is based on the high and low price of a security. The security prices are high at the upper band and low at the lower band. Bollinger Bands consist of three curves in relation to securities prices. The middle band is based on simple moving average and measures the intermediate trend. The upper and lower band is based on the simple moving average. Volatility determines the interval between the upper, lower and the intermediate bands.

The traders use this technical tool. Some traders buy when price touches the lower Bollinger band and exit when price touches the moving average in the centre of the bands.

Accumulation/Distribution Line

Accumulation/Distribution Line (AD) measures the inflow and outflow of money of a particular security. This tool indicates the volume and flow of money of a security. In other words, measures the amount of buying and selling pressure of an individual stock.

AD line helps to determine the volume is increasing on the advances or declines. An upward movement in Accumulation/Distribution Line indicates buying pressure and a downward trend shows selling pressure. It helps to spot divergences, both positive and negative.

Chaikin Money Flow (CMF)

Chaikin Money Flow (CMF) is calculated on the basis of daily Accumulation/ Distribution line. This technical tool is based on the assumption that more accumulation or buying pressure has taken place if the close price is nearer to the high price.  There is a selling pressure or more distribution taken place if the close price is nearer to the low price.

To calculate Chaikin Money Flow the cumulative total of the Accumulation/Distribution Values for a particular period is divided by the cumulative total of volume for that period.

Chaikin Money Flow oscillator (CMF) gives buy signal when value is positive and sell signal when value is negative.

Money Flow Index (MFI)

Money Flow Index (MFI) measures the strength of money flowing in and out of a security. It is rate at which money is invested and withdrawn from a particular security.

If the MFI indicator reaches 80 it is considered the stock is overbought and a reading below 20 shows the stock is oversold.

Williams %R

Williams %R indicates the current closing price in relation to high and low prices over a certain period of time. This tool is very popular for measuring overbought and oversold levels. The scale ranges from 0 to -100 with readings from 0 to -20 considered overbought, and readings from -80 to -100 considered oversold.

In an upward movement, traders may look to oversold readings to establish long positions. In a downtrend, traders may look to overbought readings to establish short positions.

Ultimate Oscillator

Ultimate Oscillator is a single bounded oscillator, which has three different time frames. Ultimate Oscillator merges stock price action of three different time period. It ranges from 0-100, where 50 is the centre line. When the range falls below 30 it is oversold and overbought ranges from 70 to 100.This technique can be used for intraday, daily, weekly or monthly data.

Learn Stocks Technical Analysis