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Technical Analysis of Stock

Technical analysis of stock is the study of supply and demand in the market in order to attempt to predict future trends. Technical analysts do not study the intrinsic value of stock but instead believe that this information along with the emotions of the market are indicated in the stock’s movements. Technical analysis provides an entire skill set of tools that will enable you to trade stock successfully. In today’s article we discuss stock market terminology associated with stock technical analysis.

Support and Resistance
Support and resistance levels deal with the ongoing battle between the bulls and the bears. Both levels are the levels at which stock traders are willing to buy stock (support levels) or sell it (resistance levels). The technical analysis of stock tells us that when the support and resistance levels deal with the market psychology of supply and demand that when these levels are broken, there is a shift.

Stock Charts and Patterns
Stock charts are basically graphical representations of a series of prices over a set period of time. When learning how to read stock charts you discover that that there are intraday, daily, weekly, monthly, quarterly, and annual time scales. Also, the shorter the time period that you are tracking, the more detailed the chart will be. Stock chart patterns are distinct formations on stockcharts that create trading signals or other signs of future price direction that indicate to traders to buy or sell their stock. Many study and use Japanese Candlesticks (a form of technical analysis of stock) to study and identify trends. Candlestick patterns are easy to use and are very identifiable.

Moving Averages
The moving average is the average price of a security over a set amount of time. The average price of a security is plotted on a chart in order to smooth out the price movement so that traders are better able to identify trends. The most common types of moving averages include the Simple Moving Average (SMA), the Exponential Moving Average (EMA), and the Weighted Moving Average (WMA).

Other stock market terms, associated with technical analysis of stock, include stochastic oscillators, the relative strength index, the moving average convergence divergence indicators, and many more technical indicators. Keep in mind that traders, who utilize technical analysis indicators, use them in conjunction with others. Rarely traders will use only one technical indicator when trading at a time. You will come across these terms and more as you continue your technical analysis education.

Market Direction:  The visual attributes of candlestick signals allow an investor to make better trend analysis assessments. The market trend can be better evaluated by not only seeing the trajectory of a trend slowing down, but also viewing the color of the candles. The trajectory of a trend does not necessarily mean the uptrend is over. It can merely show that a resting phase has come into the market. However, additional evidence of weakness can be better recognized when daily candlestick formations reveal potential selling pressure, dark bodies versus bullish bodies.

Adding that information to important indicators, such as the tee line, makes the orientation of the portfolio positions very easy. A simple rule of candlestick trend analysis is that an uptrend will continue until there is a close below the tee line after a candlestick sell signal. Is that a true reversal indicator? Not 100% of the time but the probabilities are so great that the uptrend is over, continuing to hold long positions will be going against the grain. Most investors lose money or give back a large chunk of their profits because they are "hoping" the market will continue to move in the direction of what they would like it to do versus analyzing what the charts are actually showing.


Take profits or close out newly established positions when the trend of the market is not in correlation to the portfolio. What is the biggest fear of most investors? Taking profits and then watching the price of a stock continue to move higher. Why is that fear dramatically reduced when using candlestick analysis? The signals forming in the correct conditions of a trend reveal when the probabilities indicate it is time to sell. If you constantly invest, buying or selling, using the information built into candlestick signals, you will be correct an extremely high percentage of the time.

What happens if you take profits and the price turns around and continues to move higher? The signals and patterns will usually provide the information to inform you to buy back into the position. Having this visual capability allows investors to sleep very well at night. There will be times when the signals indicate the sellers are taking control. There are also signals that negate sell signals. When this occurs, an investor has the opportunity to buy back into the uptrend in stock.



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The Candlestick Forum Team

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