STOCK CHARTS: TECHNICAL ANALYSIS AND TRADING PATTERNS
Technical analysis is an alternative investing strategy to fundamental analysis and if used correctly can be especially effective.
Stock charts are like Swiss Army knives, they are super handy tools that can be used in a variety of ways. Not only do they tell a story of the stock, but they can also be used to make precise investment decisions. The style of using stock charts to make these investment decisions is known as technical analysis and is often viewed as the polar opposite of fundamental analysis. Whether using technical analysis or not, knowing how to read stock charts is extremely important to any investor.
What is Technical Analysis?
Where fundamental analysis looks at the stock's financial statements, its competitors and markets, technical analysis uses various stock charts to determine if the company is invest-able, pin-pointing the best price and time to invest. A stock chart shows you the history of a stock's price over time and comes in a variety of formats. There are a multitude of variables that you can control in the display of stock charts that are essential to the use of technical analysis including:
- Time: you can have stock charts that show minutes, days, weeks, months or even years worth of price history.
- Chart style: you can display the data as a line graph, mountain, graph, OHLC (Open-High-Low-Close), Candlesticks, and more.
- Scaling: the vertical axis can usually be adjusted between arithmetic and logarithmic scales. The arithmetic scale is what you would expect, showing the horizontal lines at even intervals of $5 or $10 dollars ($50 in the case of Google). The logarithmic scale give you a better visual of the percent change in stock price so that a stock that the distance between a price of $20 and $40 is the same distance as $40 to $80 (both of which are 100% returns).
- Volume: displays the amount of shares trading hands everyday usually as a bar graph.
- Moving Averages: are among the most popular and important tool available to newer investors because they are easy to use and understand. Also, moving averages are used as components in many other charts and analyses. By smoothing out data points and number series, moving averages make it easier to identify trends and tendencies.
- Trend lines: graphically display the unmistakable direction in which a stock is heading.
The key to technical analysis is the history of prices paid for a stock and the volume of shares traded. The security's intrinsic value is of no concern to those who employ technical analysis as a trading method but rather rely on charts and other tools to identify patterns and trends that can suggest future activity. In other words, the only thing that matters is a security's past trading data and what information this data can provide about where the security might move in the future. The field of technical analysis is based on three primary assumptions: price moves in trends, the market discounts everything, and history tends to repeat itself.
Technical analysis can be used on any security with historical trading data. Alternative investments such as Forex, fixed-income securities (think bonds), futures and commodities are all ripe for analysis of the technical sort as well. The common application, however, remains on traditional stocks. There are variety of pre-determined chart patterns that have been identified, labelled and used by those who employ the use of technical analysis for stock investing.
Types of Trading Patterns
Technical analysis investors attempt to identify charting patterns and trade the stock based on these pre-determined price movements. Here are some brief examples of the most popular trading patterns identified in technical analysis.
Double Bottom and Top: these formations are reversal patterns that most often identify medium term and long term trend changes.
Cup and Handle: this formation literally resembles it's named a cup with a handle at the end. It is widely known thanks to the CANSLIM trading strategy popularized by William O'Neil.
Saucers: also known as “rounded bottoms” or “U-Shape” formation have the same look and feel to them as the Cup and Handle pattern, except they lack a handle and often have a wider base. They are more difficult to trade as finding a proper entry point can be tricky, however when spotted, they can yield large returns.
Head and Shoulders: this formation can be the most difficult to spot but is historically reliable. It is a reversal pattern most often formed over a period of months.
WALL STREET SURVIVOR'S BEST OF THE BEST LIST
MARCH 23, 2020: URGENT UPDATES TO HELP YOU MAKE MONEY WHEN THE MARKET IS DOWN!
Get the BEST STOCK RECOMMENDATIONS from THIS Stock Newsletter: TRY IT FOR JUST $19
The markets have dropped over 30% since their highs just a few weeks ago because of the Coronavirus, but we are starting to see more signs that this might be a PERFECT BUYING OPPORTUNITY:
#1. HOT Fool Picks in Spite of Crash. Here is why we love the Motley Fool--On Thursday, March 19, 2020 they recommended Zoom Video (Ticker ZM) when it was at $124. Today, March 23 it closed at $160, that's up 29% in 3 days! But that's not all, they also recommended it October 3, 2019 when it was at $77 so that is up 108% since they picked it back in October, in spite of the market crashing 30%. Other recent picks are TSLA, NFLX and TTD which are all UP since they were picked!
#2. Stock Prices Are Down 30%. This is a good thing! If you are thinking of buying stocks, now's your chance to get quality companies at much more affordable prices. This offers a very attractive entry point, because stocks are ON SALE and you can now buy quality stocks for 30% less than you would have paid for them in February.
#3. More Articles Are Starting To Recommend Buying. As we are nearing the bottom of this drop, we are starting to see more articles like this: BlackRock is suggesting we may be at a "once in a lifetime opportunity", Morgan Stanley says to start buying, and Warren Buffet has a stock pile of cash and rumors are he is starting to buy.
#4. Dollar Cost Averaging Works! Since nobody knows where the bottom will be exactly, smart investors continue to invest a fixed dollar amount in the market each month. This is called Dollar Cost Averaging. That way, when the markets are down you are buying more shares of your favorite stocks at cheaper prices. This helps drive down your average cost and increase your profits when the stock market moves back up.
If you need recommendations for stocks to buy now, keep in mind that the Motley Fool Stock Advisor beat the market by over 30% the last 4 years, and they are currently recommending that NOW IS THE TIME to start buying some of those quality stocks that should make up the foundation of your portfolio. The Motley Fool Stock Advisor service is recommending at least 15 stocks that you should plan on holding for the next 3 to 5 years. So, if you need investing ideas, it is a PERFECT time to consider the best stock newsletter over the last 4 years--The Motley Fool Stock Advisor
Normally it is priced at $199 per year but they are currently offering it for just $99/year if you click this link.
P.S. this offer is still backed by their 30-day money back guarantee.
P.S.S. Still skeptical? Read this complete Motley Fool Review
GET UP TO $1,000 IN FREE STOCK
WHEN YOU OPEN A ROBINHOOD BROKERAGE ACCOUNT
Robinhood was the first brokerage site to NOT charge commissions when they opened in 2013. They just past 10,000,000 accounts and to celebrate they are offering up to $1,000 in free stock when you open a new account.
Here's the details: You must click on a special promo link to open your new Robinhood account. Then when you fund your account with at least $10, you will receive one stock valued between $5 and $500. Then, you will get a link to share with your friends. Every time one of your friends opens an account, you will receive another free stock valued between $5 and $500. Click here to learn more about this Special Robinhood offer.
(before it's too late)