Technical stock analysis is one of the most common methods used in stock trading.
This method involves using charts and historical stock price data to help investors predict future stock price movements.
In this article, Polarlens.eu.org will discuss what technical stock analysis is, how to conduct technical stock analysis, and the benefits and drawbacks of using technical stock analysis.
Technical Stock Analysis or Chart Analysis
Technical stock analysis, also known as chart analysis, is a market analysis method based on the historical price movement of stocks.
This analysis involves using charts and technical indicators to assist investors in predicting future stock price movements.
In technical stock analysis, investors search for patterns or trends in stock price charts and attempt to understand what may happen in the future.
In technical stock analysis, investors try to understand market psychology and the behavior of other investors.
Performing Technical Stock Analysis
There are several steps involved in performing technical stock analysis. First, investors need to choose the time period they want to analyze.
This could be a short time period, such as one week or one month, or a longer time period, such as one year or five years.
After selecting the time period, investors then create a stock price chart for that period. The chart will show the stock price movements over time.
Technical Indicators to Predict Stock Price Movements
Once the stock price chart is created, investors then use technical indicators to help predict future stock price movements.
Some common technical indicators used are moving averages, relative strength index (RSI), and Bollinger bands.
Moving averages are a method used to smooth out stock price fluctuations and determine short-term or long-term trends.
Relative strength index is an indicator used to show whether a stock is considered overbought or oversold. Bollinger bands are an indicator that shows the level of stock price volatility.
Disadvantages of Technical Stock Analysis
Although technical stock analysis has significant benefits, it also has some drawbacks. One of the drawbacks of technical stock analysis is that stock price movements are often difficult to predict.
This is due to the fact that many factors influence stock prices, and not all of these factors can be predicted.
Additionally, technical stock analysis can also be subjective as it depends on an investor's interpretation of charts and technical indicators.
However, despite its limitations, technical stock analysis remains one of the most commonly used methods in stock trading.
This is because technical analysis provides a different perspective from fundamental analysis and can help investors make better decisions.
How to Analyze Stocks Technically
Relative Strength Index (RSI) is one of the technical indicators used to measure the magnitude of price volatility of an asset. Therefore, we can evaluate whether an asset is in an overbought or oversold position.
Moving Average Convergence/Divergence (MACD) provides an overview of the relationship between two moving averages or the average price in the asset's price trend.
Crossover is the art of looking at the trend line of Moving Average Convergence/Divergence (MACD) compared to its signal line. If the line crosses below the signal line, then the asset's price is in a bearish zone. This means that traders should sell their assets immediately.
Divergence is another type of MACD in technical analysis. When the Moving Average Convergence/Divergence line forms the highest and lowest points that are opposite to the highest and lowest points of an asset's price, this is called divergence.
Oscillator is a technical analysis tool that builds high and low bands between two extreme values. Not only that, but oscillators also build trend indicators that fluctuate within limits.
Bollinger Band shows the relative limits of price fluctuations in the form of lines drawn inside and around the structure of the traded stock price movements.