How it works
Technical analysis is done on the basis of historical price movement plotted on a two-dimensional chart. This does not include balance sheets or P&L accounts, like in fundamental analysis. This is based on the assumption that the markets are efficient and the graph encompasses price sensitive information into the graph. It 's easy to read and anybody can look at the chart and understand the price trend. You can see open, high, low and closing prices of stocks.
Learning charts will plot you on the winning axis
The chart is the foundation of technical stock market analysis. There are mainly two types: Line Chart and Candlestick Chart.
The line chart is the simplest yet crucial chart for stock market analysis. The single line on the chart represents the closing price of stocks each day. Dates are displayed along the bottom of the chart and prices are displayed on the side(s). Line charts are typically displayed using closing prices of stocks.
A candlestick chart is a more comprehensive chart for stock market analysis. It displays the stock 's open, high, low, and closing price. Given its detailed nature, these charts are very popular with investors. The top of each vertical bar represents the highest price of the stock and the bottom of the bar represents the lowest price of the stock it reached on that day. The closing price is displayed on the right side of the bar.
The red bar indicates that stock has closed lower than its opening price and white bar indicates that the stock has closed above its opening price. The time frame is displayed at the bottom.
The support and resistance prices are great indicators
Support and Resistance prices are crucial indicators to understand when to sell or buy a stock and hence, and are very essential for technical analysis. Generally, stock prices reach a support or resistance point and bounce off from there. Any further movement beyond these points indicates either down side or upside in stock prices. However, these are also dependent on buyer 's fundamental analysis of the scenario by referring to information about changes in profits, expansion, takeover, and change in management.
A support level is a level where the price tends to find support as it falls. The falling price is likely to bounce off this level rather than break through it. However, once the price has broken this level to plummet further, it is likely to continue falling until it meets another support level.
A resistance level is the opposite of a support level. It is the level where the price tends to find resistance as it rises. This means the price is more likely to bounce off this level rather than break through it. However, once the price breaks this level, it is likely to continue rising until another resistance level is met.
Understand the concept of supply and demand
The support and resistance levels are clear indicators of supply and demand. Simply put, supply is the number of shares that sellers are willing to sell at a given price. And demand is the number of shares that buyers are willing to buy at a given price. A breakout above the resistance level is evidence of an upward move as demand to buy the stock at higher prices is high. Similarly, the breaking of the support level indicates that the supply is high and the seller is ready to sell at lower levels.
Therefore, technical stock market analysis gives an efficient stock market analysis as opposed to relying on random, assumed study. While fundamental analysis depends on key events like quarterly results of corporates, announcement of earnings, or policy changes in operations, technical analysis is more dynamic as it reads concrete data, daily to give a reliable indication of market trends.