The 2 Basics of Technical Analysis

What if you could predict the future of a stock?

No, that’s not a wild or implausible scenario.

You actually CAN predict the future price movement and upcoming trend of any stock to an extent.

To do that, you just need the necessary knowledge pertaining to technical analysis.

The good news is that reading and interpreting charts are actually easier than it sounds.

BUT, you first need to master the fundamentals of technical analysis and chart reading.

If you are a complete novice to reading stock charts, or you are someone who isn’t quite sure if you do understand charts, you have come to the right place to start!

There are two fundamental skills necessary for mastering technical analysis.

These two skills are like the ABC’s of technical analysis.

Just like you need to first master the alphabets before reading a book, you need to understand these two before you can start mastering technical analysis.

What Are The 2 Fundamental Skills?

The two skills are

  • Understanding the components of a chart
  • Understanding the parts of a candlestick

#1 The components of a chart

Understanding the various components of a chart is best done with an example. The chart below shows the stock of Amazon. Let’s now see what each component is…

  • #1 Identification: Each and every chart are always labeled clearly to indicate the ticker symbol. In the example chart, AMAZON COM INC is the name and ticker symbol is AMZN. There may also be the word ‘Daily’ (or D for short) written, indicating that the daily chart is being shown. The chart can also be viewed as weekly or even monthly, depending on the charting software used.
  • #2 Summary: This section shows the last price of the stock/ index.
  • #3 Moving Averages: The moving averages indicate the general support as well as the resistance of the stock. Some of the charting software have one or two moving averages plotted on the chart by default.
  • #4 Time period: The time period is represented in the X-Axis. In the example, you can see the chart is for the months June 2017 to February 2018.
  • #5 Volume: The momentum of the market is represented by the volume. Each bar of the volume represents the volume of one day. The height of the bar represents the number of shares traded for the day. This means that the taller the bar, more the number of shares traded on the day.
  • #6: Trade range: Each candle of the chart represent the price of the stock on that specific trading day.

Now, as you can see from the chart, each day is represented by a candlestick. In the next section, you will learn how to interpret a candlestick.

#2 Interpreting a candlestick

Candlesticks basically give a visual insight into the trading psychology of the markets. In fact, a single candlestick or a combination of two or more candlesticks can be used for predicting the bullish as well as bearish market trends.

Every candlestick consists of four parts. They are:

  • High price: The highest price of the stock for that day.
  • Low price: The lowest price of the stock for that day.
  • Open price: The price at which particular stock opened for the day.
  • Close price: The price at which particular stock traded last at the market close.

In some cases, you may notice lines at the ends of the candlestick. This is called as a shadow or wick. It indicates the price action, or the highest and the lowest price of the stock for the day.

The color of a candlestick has a specific meaning. A bullish candlestick is usually represented as a white, green, or empty candle. It will have a closing price that is higher than the opening price. On the other hand, a bearish candlestick is usually represented as a red, black, or filled candle. It will have a closing price that is lesser than the opening price. The figure above shows a bullish and bearish candlestick.

Now that you have mastered the fundamentals, you are now all set to get into the complex aspects of technical analysis.

For instance, the important tools of technical analysis are Candlestick patterns, Chart Patterns, Resistance and Support levels, Trend lines and trends, Moving Averages, and Technical Indicators and Overlays.

We will cover these aspects in future lessons.

Happy Trading!

Tara

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