Here Are Five Basic Stock Chart Analysis You Can Learn to Start Your Equity Trading

Oct 24, 2019 | 1 month ago | Read Time: 5 minutes | By iKnowledge Team

Technical analysis? Frightens you, doesn’t it? It probably conjures up visions of complicated lines, squiggles, bars etc. and anyone may be forgiven for wondering how they are expected to make any sense out of them. You are probably also thinking that technical analysis is for sophisticated investors or traders and that it requires some extraordinary knowledge.

You would be only partly right then in such a case, because the thing is that what appears so complicated from afar actually grows simpler when you are near it.

Technical analysis is all about tracking the prices of stocks, analysing trends, coming to some conclusions and based on that, forecasting the future trends in the prices. The focus is on prices and not on the fundamentals of the companies.

Got that?

Right. Now you must be probably wondering whether you and I as lay investors, can possibly analyse price trends and arrive at some expectations of stock prices. My answer to that is – we definitely can do that and here I will explain five basic charts that you can analyse as a beginner to the stock markets and to technical analysis. Whether as a trader or investor, technical analysts do make profits by investing money based on such analyses. 

Discerning Trends

Whenever you look at the price of a stock you will see that it is making a discerning trend – either up or down. You need to look at prices over a period of years. Over the short term the stock price could be going up and down but when plotted over a period of 10 or 15 years you will see that the stock is either rising, going down or moving sideways (more or less keeps to a level over long time periods).

In technical analysis the trend is very important.

The charts below show examples of price trend lines that are falling, rising and moving sideways.

Falling trend line
Source: StockCharts
Rising trend line
Source: stockcharts.com
Sideways trend line
Source: schroders.com

Stock market chartists hold that you should buy a stock when it is on an uptrend. That way you are more likely to make money. So, monitoring trend is very important. You will have to find out past trends in the stock of a particular company and analyse when it started following a downtrend trend. Buy on an uptrend and avoid buying on a downtrend.

 Support and Resistance

These are two words very commonly used in technical analysis. While charting trends in prices, you will usually find that the price of a stock does not go below a certain level; this is the level at which the stock has support from the market in terms of demand for the stock. Resistance occurs when the price of a stock cannot rise about the certain level, because it faces selling pressure.

When you plot the trend line of prices over years you can easily discern the support and resistance levels. The support levels are the prices from which the stock rises, while the resistance level is the price from which the stock price falls.

Source: babypips.com

A specific support or resistance level is valid only at particular periods in time. If a stock can break its resistance level or its support level (called breakouts), then new levels are formed. Support and resistance levels are based on the dynamics of demand and supply and they have very important psychological significance.

For investors it is important to keep track of these levels. For instance, if a stock is trading near its support level you can buy the stock knowing that it will rise from these levels. Or if the stock is near its resistance level you can exit, since it will fall from that level. However watch out for breakouts. How and when to invest your money is important.

Bar charts and candlestick charts

Bar Chart

Source: StockCharts

Candlestick Chart

Source: StockCharts

So far, we have been talking about line charts, which usually plot the closing price of each day or month or year.

Bar charts and candlestick charts add more details such as the opening, high, low and closing prices of the stocks. Therefore, there is more information available to the investor or trader. From both the bar chart and the candlestick chart you can easily see whether the price of a stock has closed lower or higher than the opening price. This becomes another trend to analyse – the number of days that the stock has closed lower and the number of days it has closed higher compared to the opening prices and the trader takes decisions based on this. There are segregated into rising periods and falling periods.

The bar chart depicts the trading range of the stock for a particular period, which can vary from a minute to years. Both types of charts are usually combined with the volume data on stocks so that the prices can be related to the volumes of shares traded.

Moving averages

If tracking charts of daily price movements seems to be bit tedious and confusing, a better way of reading trends is to look at moving averages. For beginners simple moving averages should suffice. Moving averages even out daily fluctuations in stock prices. In the simple moving average add the closing prices during the time period that you are tracking and divide it by the number of prices taken. For instance, if you want the moving average over the past ten days, add up the closing prices for those ten days and then divide the sum by ten. 

Simple moving average
Source: stockcharts.com

The time period for which the moving averages are calculated depends individual traders but the most common are 50-day and 20-day moving averages. The lower the time period the more responsive it is to changes in price.

In a rising market, when there is an uptrend in the price of the stock, the line established by the simple moving average acts as a support line. When the closing price of the stock on a particular day closes about the line, it is a good time to buy. Reasoning along the same line, when there is an established downtrend in the stock price, the moving average line acts as a line of resistance and when the price closes below the moving average then it is the signal to sell.

A word of caution however to those who are just starting out on technical analysis: a stock may not always move according to what the charts suggest because of some news or change in fundamentals of the company. So, traders also need to keep a sharp eye out for what’s happening with the company, instead of relying on charts alone. To know about Aegon Life’s life insurance products like term insurance and other products, visit our home page.

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