Basics of Technical Analysis (SERIES)

Basics of Technical Analysis: Understanding Candlestick Charts, Patterns and Trend

Candlestick charts are technical tools which resemble the bar chart and are used to analyse and predict price movement in the market. A candlestick chart combines multiple data from different time frames in a single candlestick bar, which are used in deciding long and short term trading strategies. The candlestick formations and their names are unique, like Bullish or Bearish Harami, Three Black Crows, and Dark Cloud Cover.

How To Read Candlestick Charts

Candlestick charts offer a valuable visual perception of price. These charts comprise of individual candles which allows traders to pinpoint the opening price and the closing price for a period, along with the highest and lowest price points.

A bullish candle is either green or white, and a bearish candle is red or black. The candle’s rectangle body denotes the open and close price of the day, and wicks or shadows, depict the highest and the lowest prices during the trading period.

Candlestick Chart Patterns

A single bar is called a candlestick and it contains a body and shadows at both ends. It depicts the opening, high, low, and closing in the market. When two or more candlesticks are placed together, they form a pattern and indicate the bearish or bullish reversal.

  • Bullish candlestick patterns: In this case, the closing price is higher than the opening price.
  • Bearish candlestick patterns: In this case, candlesticks form with real-body and upper and lower shadows.
  • Doji patterns: A Doji is formed when the candlestick has almost the same opening and closing values. It can indicate trend reversals but also associate with market indecision.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.

Basics of Technical Analysis: Introduction to Support and Resistance Levels

Support and resistance levels are key elements in technical analysis and they are used to identify price points where the probability of a pause or a trend reversal is high.

What is the Support Level?

A support line is the lower price limit formed during a downtrend. It is formed when buyers enter the market and the fall comes to a halt. Therefore, support level is the zone where the downward trend begins to reverse.

What is the Resistance Level?

The resistance is the upper price limit formed during the uptrend. It is the complete opposite of a support level and it is reflective of the reversal of the upward trend where the rising asset price comes to a stop as investors begin to sell and secure profit.

Uses of Support and Resistance Levels

As an investor, you can use the support and resistance levels to determine the entry and exit points, set stop-loss and take-profit orders, and predict potential price reversals. In case the support or resistance levels are broken, they are indicative of bearish or bullish movements. The Significant Highs and Lows, and the Trendline, are the tools used to determine support and resistance levels.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.

Basics of Technical Analysis: Moving Averages

Moving averages is a popular and reliable technical indicator used by investors and traders to study price movement and identify the opportunities. The moving averages in the stock market jargon refers to the average of closing prices over a particular period, which can be a short term period of ten days or a long term period of 200 days or more. This averaging of the closing price helps investors and traders to access smoothened price information and removes the noise of daily price changes.

The moving averages are, however, often criticised for having a lag effect, which refers to its reliance on the past prices. Nonetheless, it is a crucial indicator and assists traders in entering and exiting positions.

How to Use Moving Averages

The medium to long term moving averages, like the 50-day or the 200-day average data, gives reliable support and resistance levels, which makes it an effective signal to buy or sell a stock.

Direction of Prices

The prices are likely on the rise when you see an upward trending moving average. However, the prices are on a decline when it is a downward trending moving average.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. Investments in securities market are subject to market risks, read all the related documents carefully before investing.

Basics of Technical Analysis: Introduction to Indicators

Whether a beginner or a veteran trader, it is important to understand the market to maximise the returns and avoid losses. Some of the beneficial tools used to maximise the returns are trading indicators.

The information that is offered by the trading indicators can help a trader in determining the direction of the trend, identify the momentum or lack of it, determine the profit potential due to volatility and determine the popularity through volume measurements.

Types of Indicators

  • Moving Averages: It refers to the average closing rates over a specific period and assists in understanding the underlying movement of the price.

  • Bollinger Bands: It is an intraday trading indicator that comprises three lines - the moving average, an upper limit and a lower one. They represent the stock’s standard deviation, or the amount by which the price increases or decreases from its average.

  • Momentum Oscillators: It helps in understanding when the market sentiments are undergoing modifications and helps identify the short-period cycles that are unrelated to the bullish or bearish market trends.

  • Relative Strength Index (RSI): It is used to compare the share price’s gains and losses and is then formulated in an index form. This index increases with price rises and vice versa.

  • Moving Average Convergence Divergence (MACD): It is a technical indicator used to identify price trends, gauge market momentum and helps in spotting potential entry and exit points for trades.

  • Stochastic Oscillator: It is a momentum indicator that compares a security’s closing price to its price range over a specific period. It helps in identifying overbought or oversold conditions.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.

Investments in securities market are subject to market risks, read all the related documents carefully before investing.

Basics of Technical Analysis: Price Action Trading

Price Action is a trading technique where price movements - whether an increase or a decrease in a stock price - are plotted over a specific duration. In simpler terms, it is the depiction of price movement designed through various types of charts.

It serves as the foundation for technical analysis of stocks and technical analysts use price action on charts to explore patterns or signs that can assist in predicting the future behaviour of a stock. It then assists traders in timing the entry and exit points of trades, determine key price levels and trends, and formulate risk management strategies.

When the price action technique is used to make trading decisions, it is known as price action trading. It is an approach to predict and speculate price, and finding entry and exit positions.

Tools Used for Price Action Trading

  • Breakouts: When a stock follows a particular trend, it tips off traders of a potential new trading opportunity when the trend is broken.

  • Candlestick Chart: It is a technical tool which resembles the bar chart and is used to analyse and predict price movement in the market.

  • Trends: A trend is the direction of a stock’s price and can be generally upward, downward, or sideways.

Advantages of Price Action Trading

  • Helps in decision making
  • Benefits short-term investment

Limitations of Price Action Trading

  • Depends solely on past price
  • Interpretations can go wrong

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.

Investments in securities market are subject to market risks, read all the related documents carefully before investing.