Basic
Learn Technical Analysis
What is Technical Analysis?
Generally investing communities depends on recommendation popularly known as “TIPS OF THE DAY”. Generally you have observed that traders ask their broker or friends – What should I Buy? or What will be the future of my stock? or What will be the price target in next one month or year? Everybody likes to know about the future of there stock. The methods used to predict the future price of a company’s stock falls into two broad categories:
1) Fundamental Analysis
2) Technical analysis.
Those who use technical analysis look for peaks, bottoms, trends, patterns and other factors affecting the stock price movement and then make buy/sell decisions based on those factors. It is a technique that many people attempt, but few are truly successful at it. The world of technical analysis is huge today. There are literally hundreds of different patterns and indicators that investors claim to have success with.
Technical Analysis is forecasting of future financial price movements based on an examination of past price movements. The main principle in technical analysis is “History always repeat it self”. Like weather forecasting, technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipating what is “likely” to happen to prices over time. Technical analysis uses a wide variety of charts that show price over time.
Technical Analysis is not just drawing a line or watching chart it is an art. Art of predicting, art of profit making, art of listening to the chart. It gives wisdom, wisdom that whether I have to buy, sell or hold. It shows a path, direction and destination. However random walk theory says that stock market prices moves like a drunked person walking on the street. But it’s my belief that technical analysis helps you in decision making.
Technical analysis is a big deal because it involves individuals own skill of interpretation. It may so happen that every analyst may advice or gives you different advice or in other words no analyst are always correct. But using technical analysis knowledge one can really reduce their risk and make their investment decision more wiser and profitable one. It is not important to trade but it is important to improve profitable trade. Technical analysis helps you in improving profitable trades. A casino makes money on a roulette wheel, not by knowing what number will come up next, but by slightly improving their odds with the addition of a “0″ and “00″. That’s not gambling–it’s intelligence. Yet many investors buy securities without attempting to control the odds.
Dow Jones Theory
Dow Jones Theory is the Bible for traders, who want to trade in stock market. Dow Jones Theory has been established by Charles Dow. Theory established by him is very well known guide for investors and traders from years. Charles Dow has established one company in 1900 publishing one very well known Financial Magazine called “Wall street Journal” based on his years of experience of trading in stock market. The theory established by Charles became so famous that NYSE index has been known by his name “DOW JONES”.
This most popular theory is regarding the behaviour of stock market prices according to Charles Dow “The market is always considered as having three movements, all going at the same time.
1) Daily Fluctuations – This is the narrow movement from day to day.
2) Secondary movement – This is the short swing running from two weeks to a month or more and
3) Primary movement – This is the main movement, covering at least 4 years in its duration.
The theory advocates behaviour of stock price is 90% psychological and 10% logical. The behaviour is contingent upon the mood of the investors at large and this behaviour can fairly estimated by analyzing various price movements and volume of transactions.
Primary Movements: They reflect the trend of the stock market from last one year to four years or sometimes even more. On study of the long range behaviour of market prices, it has been empirically observed that share prices go though definite phases, Where the prices are either consistently rising or falling. These phases are popularly known as bull and bear phases. So long as each successive rally or price advance reaches a higher level than the one before it, and each secondary reaction, or price decline, stops at a higher level that the previous one, primary trend is up. This is called a “Bull Market”. When each intermediate decline carries prices to successively lower levels and each intervening rally fails to bring them back up to the top level of the preceding rally, the trend is down. This is called a “Bear Market”. Popularly Bull market is known by formation of “Higher Tops and Higher Bottoms”, and Bear Market is known by formation of “Lower Tops and Lower Bottoms”.
Secondary Movements: The secondary trends are intermediates declines or “corrective phase”, which occur in bull market and intermediate rallies which occur in bear markets. Normally they last from 4 weeks to 13 weeks. Generally it retraces 33.33% or 66.66% of primary movements. It is imperative to note here that secondary movements are always in opposite direction of the primary movements.
Daily Movements: They are irregular fluctuations, which occur every day in the market. These fluctuations are without any definite trend. Thus if the daily share market price index for a few months is plotted on the graph it will show both upward and downward fluctuations. These fluctuations are on account of speculative factors.
BUY or SELL based on DOW Jones Theory
Sample Trade Set up using Dow Jones Theory:
Types of Chart
Any one who wants to learn Technical Analysis has to first plot daily price on graph paper. This exercise gives a graph on stock price which are popularly known as Chart. Now with the help of computer one can easily draw different graph on his computer. With the help of chart one can identify different pattern emerges on chart and also trend of market. There are different types of charts
1) Bar Charts
2) Line Charts
3) Candle Stick Charts
Bar Charts:
This is one of the most popular types of charts used in technical analysis. As illustrated below, the top of the vertical line indicates the highest price at which a security traded during the day, and the bottom represents the lowest price. The closing price is displayed on the right side of the bar and the opening price is shown on the left side of the bar. A single bar like the one to the left represents one day of trading.
Candlestick Chart
They have been around for hundreds of years. They are often referred to as “Japanese candles” because the Japanese would use them to analyze the price of rice contracts. There are two part in candle
1) Wick
2) Body.
Wick shows High price and Low price of day. Similar to a bar chart, candlestick charts also display the open, close, daily high and daily low. The difference is the use of color to show if the stock went up or down over the day. There two kinds of candle
1) White Candle: It appears when Opening price of stock is lower than Closing price of stock on a particular day.
2) Black Candle: It appears when Closing price of stock is lower than Opening price of stock on a particular day.
Line Charts:
This is common type of chart. Line charts only shows movement of closing price of stocks. Line chart is formulated just by joining the daily closing price of stock. It dose not depict the high and low price of day. A line chart’s strength comes from its simplicity. It provides an uncluttered, easy to understand view of a security’s price.
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