There are two main schools of thought when it comes to stock analysis. A school of thought that uses fundamental analysis to analyze companies and attempts to gauge the value of a company and therefore the price at which a stock should sell. Another school of thought is known as technical analysis, which uses tools such as chart patterns and trend analysis:
- Fundamental Analysis - Using economic data, historical financial information contained in financial statements, and financial projections, to determine the intrinsic value or fair value of a business.
- Technical Analysis - Much depends on the current market sentiment and investor sentiment in stock selection.
If you are like many new investors, you may be wondering who uses technical analysis and who uses fundamental analysis? In general, fundamental analysis is applied by long-term investors, while technical analysis is mainly applied by short- and medium-term traders.
The following table details some of the differences between fundamental and technical analysis:
| Fundamental | Technical | |
|---|---|---|
| Data | Financial Statements | Charts |
| Focus | Quantitative and Qualitative Factors | Price and Volume |
| Term | Medium to Long Term Approach | Short to Middle Term Approach |
| Function | Investing | Trading |
What Is The Purpose Of Technical Analysis?
There is a theory that the stock market is "efficient," which means that all stock market investors act "rationally." The efficient market hypothesis (EMH) has a flaw in that it ignores essential forces such as human emotions. Those who rely on technical analysis believe that market psychology, rather than an efficient market, drives stock prices.
Market psychology employs human psychology to gauge stock market emotion and forecast future market prices. These are thought to be recognizable because they reoccur in the form of price patterns that can predict the market's trend and direction.
Market Herding
Is an important idea in market psychology. Market herding assumes that many market participants don't conduct their own research and instead follow what others are doing. This leads to a herd mentality, in which investors follow the investments of others rather than thinking for themselves. The efficient market theory is violated by herding.
Three Technical Analysis Principles
Technical analysis is based on three key principles:
- Everything is discounted at the market. The price of an item takes into account all known information, including basic (financial outcomes), political, economic, psychological, and other factors.
- Prices follow a pattern. Short-, medium-, and long-term trends, according to technical analysts. In other words, a stock's price is more likely to stick to a previous pattern than to stray. This premise underpins the majority of technical trading systems.
- The past repeats itself. Market psychology is responsible for price changes, and market players respond to market stimuli in a predictable fashion over time. Over time and across asset classes, these pricing trends become predictable.
Technical analysis uses market psychology and concepts like herding to explain market sentiment. Trading relies heavily on human behavior and market psychology, which rely on the view that humans react in similar ways to similar situations. This human behavior and tendency to react in similar ways leads to predictable behaviors. These behaviors are seen in the market through market patterns, which is why traders use patterns to project or predict future price action.
Some important tools technical analysts use to measure and predict trends include charts, patterns, and trends.
Three Principals of Technical Analysis
- Market Behavior Discounts Everything. Asset prices discount all known news, including basic news (company financial results), political, economic and psychological.
- Price of Moves With Trend. Technical analysts believe that prices will move on short-term, medium-term and long-term trends. In other words, stock prices are more likely to continue past trends than to move erratically. Most technical trading strategies are based on this assumption.
- History repeats itself.Price movements can be due to market psychology, and market participants respond consistently to market stimuli over time. These price patterns repeat over time throughout the asset class.
Technical analysis uses concepts such as market psychology and grazing to describe market sentiment. Trading relies heavily on human behavior and market psychology. It is based on the concept that people react in a similar way to similar situations. This tendency to react in a manner similar to human behavior leads to predictable behavior. These behaviors are seen in the market through market patterns. Therefore, traders use patterns to predict or predict future price fluctuations. Important tools used by technical analysts to measure and predict trends include charts, patterns, and trends.
3 Types of Charts
There are three main charts used by technical analysts.
- Line Chart
- Bar Chart
- Candlestick Chart
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Line charts and candlestick charts are most commonly used by traders, although each of the charts above can be important. The line chart is easy to understand as it only shows price changes (often closing prices). Candlestick charts are often used because traders are interested in both price changes (open and close stock prices) and stock price fluctuations over a period of time. The candlestick chart helps traders visualize price changes over time. The candlestick chart is a bit complicated, so I will explain the candlestick chart below
The chart above shows how the candlestick chart works. On the left side of , the movement of the stock price on the trading day is displayed. Displays the open price, high price, low price, and close price. The candlestick is a powerful tool because it provides a way to visualize all four points in one small visual. You can see the green candle on the right side. The lower body indicates the low price of the day, the beginning of the lower body indicates the beginning of the day, the upper body indicates the closing price, and the upper body indicates the high price of the day. Candlestick color is important because it represents a positive or negative day.
As you can see, the green candle shows a closed stock at a higher price than it opened. Red candles closed at a cheaper price than they opened. The candlestick is a great way to visualize the extent to which stocks move over a particular period of time. To better understand how the candlestick works in the time frame, you can look at the chart below.
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As you can see, candlesticks can be represented as anything from daytime and daily to weekly and monthly. The timescale of the candlestick chart you choose depends on how short or long you hold the position before selling, or your trading style. You may be wondering which type to choose between candlestick charts, line charts and bar charts. In general, it comes down to personal taste. Traders may see line charts and candlestick charts, or both line charts and bar charts. Bar charts and candlestick charts represent
Candlestick Patterns Wedges Triangles and Rectangles
Successful trading needs a sharp eye to see with your bare eye patterns to enter and exit the trade. Here are the following candle patterns that you need to be familiar with in order to trade using price action. Since indicators are not 100% reliable but it gives you a summary say for the next 30 days according to your period set up where the market going or its direction.
- Bullish Abandoned Baby
- Bearish Abandoned Baby
- Bearish Engulfing Pattern
- Bearish Harami Candlestick Pattern
- Doji Candlestick Pattern
- Bullish Candle Stick Pattern
- Falling Three Methods Candlestick
- Shooting Star
- Bullish Spinning Top
- The Three Black Crows
- The Three Inside Up/Down
- Tweezer Top and Bottom Candle Stick Pattern
The Bullish Abandoned Baby is a three-bar pattern in a downtrend. It consists of a strong bearish candle, a doji with a hole and then a strong bullish candle that spreads out. This pattern signals the potential end of a downtrend and the start of an uptrend. Some traders allow a slight variation.
A bearish abandoned baby is a specialized candlestick pattern consisting of three candles, one bullish, the second holding and the third bearish. Technical analysts expect this pattern to signal at least a short-term reversal from the currently rising price levels. The occurrence of this pattern is quite rare, appearing about 50 times in the past two decades on SP 500 stocks. The signal is usually followed by short-term bearish
A bearish entrapment pattern is a technical chart pattern that suggests an imminent drop. The pattern consists of an upward candle (white or green) followed by a large downward candle (black or red) that devours or "devours" the smaller upward candles. This pattern can be important because it shows that sellers are overtaking buyers and buyers
The bearish Harami is a Japanese two-legged candlestick pattern that suggests prices may turn down soon. This pattern consists of a long white candlestick followed by a small black candlestick. The opening and closing prices of the second candlestick must be included in the body of the first candlestick. An uptrend precedes a bearish Harami formation.
A doji - or more specifically, "dо̄ji" - is the name of a session in which a security's candlesticks have roughly equal opening and closing prices and are often a composition of patterns. The Doji candlestick looks like a cross, an inverted cross or a plus sign. In essence, dojis are neutral patterns that are also present in several important patterns. Doji candles form when a security's open and close are roughly equal in a given time frame and often signal a reversal pattern.
A bullish reversal candlestick pattern suggests that the ongoing downtrend is about to end and may turn into an uptrend. A bullish candlestick pattern can consist of one or more candlestick patterns. Before proceeding consider this. A bullish reversal pattern should form at the end of the downtrend. Otherwise it works like a continuation pattern. The reversal signal given by the bullish reversal pattern should be confirmed by other indicators like a huge trading volume.
A descending three-way pattern is characterized by two long candlesticks (one at the beginning and one at the end) in the direction of the trend and three short countertrend candlesticks in the middle. A falling three-way pattern shows traders that the bulls are not yet confident enough to reverse the trend.
A shooting star is a bearish candlestick with a long shadow above, little or no shadow below, and a small body near the daily low. Appears after an uptrend. In other words, a shooting star is a type of candlestick that forms when a security opens, rises significantly, but then closes the day near its open price.
For a candlestick to be considered a shooting star, it must show a pattern during a price increase. Also, the distance between the daily high and open prices should be at least twice the body of the shooting star. There should be little or no shadow under the body.
Bullish Spinning Top. The top is a candlestick pattern with a short body vertically centered between long upper and lower shadows. Candlestick patterns represent indecision about the future direction of the asset. This means that neither the buyer nor the seller can get the upper hand.
A candlestick pattern forms as buyers push prices higher and sellers push prices lower during the same period, but the closing price was very close to the opening price in the end. After a sharp price rise or fall, the gyro can indicate a potential price reversal if the next candle confirms it.The top closing price can be above or below the opening price. , but the two prices are always close to each other.
Three Black Crows is a term used to describe bearish candlestick patterns that can predict an uptrend reversal. A candlestick chart shows the opening, high, low and closing price of a particular security. For rising stocks, the candle is white or green. Moving down will make it black or red.
The black crow pattern consists of three consecutive long-bodied candlesticks that open within the actual body of the preceding candlestick and close lower than the preceding candlestick. Traders often use this indicator in combination with other technical indicators and chart patterns to confirm trend reversal.
The terms "three insides" and "three insides" refer to a pair of candlestick reversal patterns (each containing three individual candles) that appear on a candlestick chart. The pattern calls for the formation of three candles in a particular sequence, which indicates that the current trend has lost its momentum and may start moving in another direction.
The Inside Three Up pattern is a bullish reversal pattern consisting of a large bearish candle, a smaller bullish candle contained in the previous candle, and then another bullish candle that closes above the close of the second candle.
The inner bearish three-way pattern is a bearish reversal pattern consisting of a large bullish candle, a smaller bearish candle within the previous candle, and then another bearish candle that closes below the closing price of the second candle. These patterns are short-term in nature and do not always result in significant or even small trend changes.
Consider using these patterns in the context of an overall trend. For example, use three reverse slopes in a pullback in an overall
Tweezers up and down, also called tweezers, are reversal candlestick patterns that indicate potential changes in price direction. Both patterns consist of two candlesticks occurring at the end of a trend about to die. The Tweezers Bottom Candlestick Pattern is a bullish reversal pattern seen at the bottom of a downtrend. It consists of two candlesticks, the first candlestick corresponding to the bearish trend and the second candlestick reflecting the more bullish market sentiment when the price rises in the opposite trend.
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