Stocks technical analysis
In today’s equities marketplace, the technical analysis of stocks is a popular discipline. Each day, millions of market participants use tools, indicators, and price action as primary decision-making mechanisms. Read on to learn more about the advantages and disadvantages of stock market technical analysis. The Technical Analysis of Stocks Technical
analysis is the study of past and present price fluctuations to predict future market behavior. It is a go-to method in the forex, futures, and shares markets. Within the realm of equities, technical analysis helps market participants address volatility in shares, indices, and exchange-traded funds (ETFs) from a practical standpoint. Of course, you should
remember a few important pros and cons when using technical analysis to trade and invest in stocks: Pros Every type of analysis has unique advantages. The following benefits of the technical analysis of stocks are worth consideration: Objectivity When applying technical analysis to stock prices, it’s relatively simple to stay objective. Remember,
technical analysis is the study of price action in isolation—no external factors are considered. When a trader buys or sells a stock based on technical analysis, the decision is free of nuance. Past and present price behavior dictate an action. In this way, subconscious, personal, and obscure biases are avoided. Consistency Technical tools and indicators
are mathematically based. They are derived from price data using formulae without ambiguity. Although the actual values vary, calculations are based on a structured analytical approach. For example, assume Trader A is a big fan of the 200-day simple moving average (SMA). Trader A can rest assured that no matter which stock the 200-day SMA is
placed on, the value is derived in a standardized fashion. So Trader A’s 200-day SMA technical analysis of stocks is consistent. Regardless of the stock or price, it provides an apples-to-apples comparison of the period’s price action. System Building A trading system is a structured, rules-based approach to buying and selling securities. It’s a set of
parameters that governs every action a trader makes in the market. The objective consistency of technical analysis makes it an ideal foundation for stock investment and trading systems. Cons No analytical base is free of drawbacks. Here are three downsides of technical analysis: False Signals The technical analysis of stocks indeed promotes
consistency and objectivity, but it is also a rigid approach to trading. Regardless of the state of the market, technical indicators continue to produce data and buy-sell signals. This is what they are designed to do, but the odds of creating false signals increase during less-than-ideal trading conditions. Hindsight Bias Another downside to relying on
technical analysis for crafting trading decisions is hindsight bias.
Technical tools are frequently deemed effective or ineffective per backtested results. Unfortunately, backtesting studies often fall victim to pitfalls like data back-fitting, flawed historic data sets, and user bias. With inaccurate backtesting, an indicator may be applied improperly in the live market. Lack of Fundamentals Technical analysis does not
account for the fundamentals local to the stock market or individual shares. Important economic releases, corporate reports, and external events are all ignored. Key fundamentals can drive long- and short-term volatility in the markets. Although the technical analysis of stocks accounts for enhanced price action, it doesn’t factor in the increased risks
posed by evolving market conditions. Interested in Becoming a Market Technician? To become an expert in technical analysis, you have to start somewhere. StoneX’s e-book, Technical Analysis for Beginners, is a great place to begin your journey. Before you trade another share of stock, download your complimentary copy here. Select Technical
Analysis of Stocks Top Technical Analysis Books Top Technical Analysis Apps Top Technical Analysis Tools Fundamental Analysis of Stocks Top Fundamental Analysis Books Top Fundamental Analysis Tools Technical Analysis Vs Fundamental Analysis Trend Analysis on Charts Return on Equity Return on Assets Return On Capital Employed Debt
Equity Ratio Dividend Yield Support and Resistance Earning Yield Components of Fundamental Analysis Learn Fundamental Analysis Learn Technical Analysis Does Technical Analysis Work? Is Technical Analysis Profitable? How to do technical analysis of stocks Stock market prediction is a challenging task, it is difficult to say that what would be the
potential move in the share market, and Technical analysis of a stock is the study of the historical data of stocks, including volume and price. The aim of technical analysis is to use past behaviour of the stock to predict the future price. In a volatile equity market, every investor wants to use the best method to analyze the stocks.
Technical analysis is generally used to capture the markets up and downs in coming one or two weeks. It is the analysis of short-period price prediction. Let’s have a quick look, in this review, on how you can carry on with the intraday technical analysis of stocks before placing an order in the stock market.
This also needs to be understood that you can definitely learn technical analysis and ideally you must be doing that. Nonetheless, let’s understand the concept first. Technical Analysis of Stocks India Technical analysis of stocks is a method of analysis of stocks by using historical chart pattern of stocks which are publicly available. This method of
analysis is mainly associated with equity but can be used for some different types of securities also. In other words, Technical analysis means predicting the behaviour of the stock price by looking at the previous trends of price and volumes by using their charts and other technical indicators. It is generally used by short-term traders who want to
make quick money by observing patterns in stock prices. They do not concern themselves with the overall health of a company and are not interested in knowing the fundamentals of the company before investing in it. Historically, technical analysis evolved from the theories of Charles Henry Dow, who is known as the Father of Technical Analysis.
Behind this whole concept, there are three Dow’s theories which serve as the basic assumptions behind technical analysis. Technical analysis Vs Fundamental Analysis Fundamental analysis of stocks focuses on a company’s financials, management, economic policies etc. to do an analysis. With a change in numbers of financial, future stock price
prediction changes. It is the most common method used by market participants to analyze a stock. On the other hand, the Technical analysis of stocks focuses on past price chart patterns and predicts the future price of the stock.
Both fundamental and technical analysis is used for future price prediction of stocks but takes different data into account for analysis. Technical Analysis of Stocks Assumptions While you delve into the depths of stock market analysis, there is a set of few assumptions that you need to consider, otherwise, you may just end up getting confused and
placing loss-making trades. Here is a quick look of such assumptions using in technical analysis of stocks: 1. Stock Price Already Reflects All Known and Unknown Information in Public Domain: As per this theory, all the factors that can have an impact on the stock prices have already been discounted in the current stock price. Therefore, it is safe to
assume that the current stock price is of fair value. It is neither underpriced nor overpriced. 2. Prediction of Price Movement is Possible: This underlying assumption means that the price movements of any stock can be charted and predicted. Although there are some random movements, however, the stock market is also full of identifiable tends
which, if spotted, can make huge gains for the traders. The whole theory of technical analysis revolves around “Trends“. 3.
History Repeats Itself: This one seems quite obvious after reading the first two assumptions. Technical analysts believe that people react to price movements in remarkably similar ways. For example: In bull markets India, traders want to earn more and more and thus, keep on buying despite high prices. Now you must be wondering about what a Bull
Market is? No worries, click here to read in detail about the Bull Market.
Similarly, in bearish markets, people have negative sentiments and focus on selling even though the prices at that time are quite low. Now, let us discuss the ways in which the activity of prices is captured on a daily basis to observe trends.
There are four prices that are recorded during the day: Open: This is the first price at which a trade gets executed when markets open in the morning. High: This is the highest price at which a trade could be executed during the trading day. Low: This is the lowest price at which a trade could be executed during the trading day. Close: This is the last
price at which the markets got closed. This is an important indicator of whether the day had been bullish or bearish. If the open price is lower than the close price, the day is considered to be a positive day and if the close price is lower than the open price, the day is considered to be a negative one. How to do Technical analysis of Stocks? Following
are twelve important steps of technical analysis of stocks to understand Dow’s theories of technical analysis. Dow’s theory is Charles Henry Dow’s theory, who is the founder and co-founder of the wall street Journal and Dow Jones and company respectively. Three of Dow’s investment theories are a good guide to technical analysts. This might look a
bit repetitive with the above section but there is a little change in the overall drift. Following are the theories which explain how technical analysts use them: 1. The stock market reflects all known information According to the first theory; the stock market reflects all known information.
Known information refers to all those information which are available by any means publicly. Technical analysts don’t take any financial information into account for analysis. They don’t relate themselves to the price-to-earnings ratio (P/E), Return on equity ratio, shareholder equity or any other ratio like fundamental analysts. 2. Price movement can
be predicted: According to this theory, the price movement of stocks can be predicted and charted.
Everyone knows Price moves randomly and there is not a fixed pattern. But as per theory, this case is not always, price movement repeats itself sometimes or moves in a known trend. Once you understand the trend, it’s quite possible to make money. You can go with the strategy of buying at a low price and selling at a high price. Also, you can make
good positions for future trading.
3. History repeats itself This theory tells that the history of stock market repeats itself. Means investors and market players react in the same way as they reacted in the past because of the same situation, news or company announcements.
So, Technical analysts use their knowledge of how trader reacted in the past and what was the effect on the stock. 4. Focus on a short period Technical analysis of stocks focuses on a short period of time like as long as one month and shortest of one minute also.
As the purpose of the fundamental analysis is an investment for long-term, but in technical analysis, the focus is for a short period. If you want to make money in a short period or buying and selling repetitively then this method of analysis best suits you. 5. Use Charts and graphs for stock price trends: Technical analysis of stocks uses charts and
graphs to read spot price trends. A chart tells you a lot about the trend of price movement.
Where the current price of a stock is heading can be easily predictable through charts. Trends can be classified on the basis of duration and types. 6. Uptrends The upward movement is known as an uptrend.
Everyday stock price moves towards a new high and then falls to low as they did previously. You must know that this upward movement at its high is not lifetime high, but it could be high of last day, week or month. This steady high and low price reflects that the market is positive about the stock. It is an indication that one can buy this stock as this
is on an upward trend. So, every time when a stock falls, investors take it as a chance to buy. They don’t wait for the price to fall further. 7. Downtrends Downtrend refers to a pattern, where stock price falls continuously. You can notice not only peaks are lower but troughs are also lower. It means market players are convinced that the stock price will
fall further. So, investors wait to a little rise in the price to sell their existing positions.
At this point in fall, investors never prefer to buy further because of its downward trend. If you are short term investor then it will be a loss-making position for you, but if you are a long-term investor you may wait for a little more price fall. 8. Horizontal trends/ Sideways A horizontal trend is a trend in which there is no fixed trend. Only peaks and
troughs are constant. But, you can’t decide where to buy or sell a stock. 9. Support and Resistance Support and resistance are two concepts of price movement in technical analysis of stocks. Price of stock stops and reverses at a certain predetermined price level. Support is a price level where a downward trend of price movement is expected to stop.
At this point, the price of the stock falls and demand of the stock increases which forms a support line. Resistance refers to the highest price of a stock where it reaches before traders start selling and stock price to fall again. Once the area of support and resistance is identified, trading will be easier for you. As if the price reaches any of these points,
there are two possibilities. First, it may beak that level and go upward or downward. And, second bounce back away from any of two levels. 10. Attention to the trade volume While performing technical analysis of stocks, if you want to be confident about the trend of the stock price, volume of trades must be watched. You can get much information
about what is actually happing in the market through trading volume. If the volume increases with the increase in the price of the stock, the trend is probably valid. And, if the volume of trade increases slightly, probably it is due to the reverse trend.
11. Use of Moving average technique for removing minor price fluctuation Moving average is a technique to get an idea of a set of a trend. It is useful for forecasting of long-term investment. This method removes unnecessary highs and lows to make overall trend visible clearly. There are many methods for moving average. Such as Simple moving
average, weighted average and exponential moving average. 12.
Use of indicators and Oscillators Indicators is a calculation of technical analysis which supports the trend of information of price movement. It helps you to come to your decision to buy and sell. Leading indicator is useful during a horizontal trend when the movement of the stock is not fixed. Technical Analysis of Stocks by Charts There are four kinds
of charts that can be used during technical analysis of stocks: Line Charts: They are plotted by joining closing prices of any stock or index. They can be prepared by checking closing prices on monthly, weekly and even hourly basis. Bar Charts: Bar charts depict all the four key prices of the day, namely, open, low, high and close. The picture below
shows how a bar chart can be made and how it shows a positive or negative sentiment during the time period. Candlestick Charts: These are the most important ones and the most commonly used by traders. They also depict the open, low, high and close prices of a stock. It looks like the picture below: A candlestick has three parts: The real body: It is
made by joining the open and close prices. The bodies of bullish and bearish candles are depicted in different colours. For example: in the picture above, we are using white colour for the bullish candle. i.e. when the open price is less than the closing price. And, black colour is being used to show bearish candle where the close price is less than the
open price. Upper shadow: It connects the high price to close price in case of a bullish candle. Similarly, in case of a bearish candle, it connects the high price to the open price. Lower shadow: It connects the low price to open price in case of a bullish candle. Similarly, in the case of a bearish candle, it connects the low price to the close price.
Candlesticks are easy to interpret and can be made for different time frames like monthly, weekly, daily or intraday charts.
They make certain patterns which help in predicting the future price of a stock or index. There are numerous types of patterns of candlesticks that we will be discussing as a different topic in another post. 4. Point and Figure Charts: They depict price movements without considering the passage of time. They consist of X’s and O’s that represent price
movements in different directions.
X’s represent a rise in prices. O’s represent fall in prices. One X on a graph means one price unit rise and one O means one price unit fall. If a stock price unit has increased four times, a column of 4 X’s is plotted.
Therefore, X’s and O’s can never appear in the same column. Please see the picture below for more clarity. Technical Analysis Books Now we have already talked about different ways of doing technical analysis of stocks but here is the question of how a beginner can understand all those technical aspects of the market.
Doing technical analysis is not easy and therefore as a beginner, it becomes crucial to get into the depth of each and every important aspect of the market. For this, one can check for different share market courses, or to gain knowledge at their own level they can refer to some of the books available in the market. The books no doubt give a better and
in-depth understanding of all the major and minor useful concepts of the market. Not only this, they get aware of the terms used in the technical analysis of stocks that further help them in learning. Here is the list of some of the best books on technical analysis: 1. Getting Started in Technical Analysis by Jack Schwager Want to learn about oscillators,
indicators, price-action, and other important trading tools, then this is the book by Jack Schwager that covers important and almost all the important concepts of the share market technical analysis. In this book, you would be able to learn about chart patterns, the importance of time frames in charts, the philosophy of trading, and lots more. In all, it is
a one-in-all technical analysis book for beginner traders. 2. Technical Analysis of Financial Markets by John J. Murphy Knowing the meaning of technical analysis of stocks and its practical application is what is explained in depth in this book. The author tried to cover all the major things that beginner traders should know before starting their trading
journey. Not only the intraday and another short form of trading but also, the book covers the useful aspects of Futures and Options Trading and the importance of technical analysis in the derivatives market. 3. Japanese Candlestick Charting Techniques by Steve Nison Japanese Candlestick analysis, charting techniques, patterns, etc changes the way
a trader views the market. It is the evolution in the stock market that benefits a trader.
If you want to know about these charts and their technical aspects right from scratch than wait no more and get this book now. It covers all the important and useful aspects that defines and make candlestick charts the most popular and useful charts in stock market analysis.
4. Technical Analysis of Stock Trend by Robert D. Edwards, John Magee If you want to gain an in-depth understanding of the bar charts and other forms of charts used in the share market, then this is the book that helps you in understanding the concepts. This book was published in the year 1948 and is updated from time to time to give the reader a
better context and knowledge in terms of current market conditions.
5. How to Make Money Trading With Candlestick Charts, By Balkrishna M Sadekar Determining different signals generated from candlestick charts and how to use them in analyzing the market trend, finding the support and resistance level, and the ways to calculate the stop loss value. All these concepts are explained in simple language by an Indian
author. This book helps you in understanding the Indian market in a better way and provides you the knowledge of different strategies useful for short-term trades.
Technical Analysis of Stocks – Summary Before we end this piece on Technical Analysis of stocks, let’s just quickly revisit the different theories around the very concept itself. Understand clearly about all three investment theories of Dow. Try to look for a short period of results. Try to understand the trends of the stock. Get an idea of support and
resistance. Know about the trade volume in the market. Get the overall idea of the trend by using the moving average method. Use Indicator and oscillator which Supports what price movements are telling about your decision to buy and sell. Are you looking to get started with Share Market Investments? Just fill in some basic details in the form below
and a callback will be arranged for you: More on Share Market Education: In case you are interested to know more about Technical Analysis of Stocks or Online Share Trading in general, here are some reference tutorials for you: 5 Predicting the probable future price movement of a security based on market data Technical analysis is a tool, or
method, used to predict the probable future price movement of a security – such as a stock or currency pair – based on market data. The theory behind the validity of technical analysis is the notion that the collective actions – buying and selling – of all the participants in the market accurately reflect all relevant information pertaining to a traded
security, and therefore, continually assign a fair market value to the security. Past Price as an Indicator of Future Performance Technical traders believe that current or past price action in the market is the most reliable indicator of future price action. Technical analysis is not only used by technical traders. Many fundamental traders use fundamental
analysis to determine whether to buy into a market, but having made that decision, then use technical analysis to pinpoint good, low-risk buy entry price levels. Charting on Different Time Frames Technical traders analyze price charts to attempt to predict price movement.
The two primary variables for technical analysis are the time frames considered and the particular technical indicators that a trader chooses to utilize. The technical analysis time frames shown on charts range from one-minute to monthly, or even yearly, time spans. Popular time frames that technical analysts most frequently examine include: 5minute chart 15-minute chart Hourly chart 4-hour chart Daily chart The time frame a trader selects to study is typically determined by that individual trader’s personal trading style. Intra-day traders, traders who open and close trading positions within a single trading day, favor analyzing price movement on shorter time frame charts, such as the 5minute or 15-minute charts. Long-term traders who hold market positions overnight and for long periods of time are more inclined to analyze markets using hourly, 4-hour, daily, or even weekly charts. Price movement that occurs within a 15-minute time span may be very significant for an intra-day trader who is looking for an opportunity to realize a
profit from price fluctuations occurring during one trading day. However, that same price movement viewed on a daily or weekly chart may not be particularly significant or indicative for long-term trading purposes.
It’s simple to illustrate this by viewing the same price action on different time frame charts. The following daily chart for silver shows price trading within the same range, from roughly $16 to $18.50, that it’s been in for the past several months. A long-term silver investor might be inclined to look to buy silver based on the fact that the price is fairly
near the low of that range. However, the same price action viewed on an hourly chart (below) shows a steady downtrend that has accelerated somewhat just within the past several hours. A silver investor interested only in making an intra-day trade would likely shy away from buying the precious metal based on the hourly chart price action.
Candlesticks Candlestick charting is the most commonly used method of showing price movement on a chart. A candlestick is formed from the price action during a single time period for any time frame. Each candlestick on an hourly chart shows the price action for one hour, while each candlestick on a 4-hour chart shows the price action during each
4-hour time period. Candlesticks are “drawn” / formed as follows: The highest point of a candlestick shows the highest price a security traded at during that time period, and the lowest point of the candlestick indicates the lowest price during that time. The “body” of a candlestick (the respective red or blue “blocks”, or thicker parts, of each
candlestick as shown in the charts above) indicates the opening and closing prices for the time period.
If a blue candlestick body is formed, this indicates that the closing price (top of the candlestick body) was higher than the opening price (bottom of the candlestick body); conversely, if a red candlestick body is formed, then the opening price was higher than the closing price. Candlestick colors are arbitrary choices. Some traders use white and black
candlestick bodies (this is the default color format, and therefore the one most commonly used); other traders may choose to use green and red, or blue and yellow. Whatever colors are chosen, they provide an easy way to determine at a glance whether price closed higher or lower at the end of a given time period. Technical analysis using a
candlestick charts is often easier than using a standard bar chart, as the analyst receives more visual cues and patterns. Candlestick Patterns – Dojis Candlestick patterns, which are formed by either a single candlestick or by a succession of two or three candlesticks, are some of the most widely used technical indicators for identifying potential
market reversals or trend change. Doji candlesticks, for example, indicate indecision in a market that may be a signal for an impending trend change or market reversal. The singular characteristic of a doji candlestick is that the opening and closing prices are the same, so that the candlestick body is a flat line. The longer the upper and/or lower
“shadows”, or “tails”, on a doji candlestick – the part of the candlestick that indicates the low-to-high range for the time period – the stronger the indication of market indecision and potential reversal.
There are several variations of doji candlesticks, each with its own distinctive name, as shown in the illustration below. The typical doji is the long-legged doji, where price extends about equally in each direction, opening and closing in the middle of the price range for the time period. The appearance of the candlestick gives a clear visual indication of
indecision in the market. When a doji like this appears after an extended uptrend or downtrend in a market, it is commonly interpreted as signaling a possible market reversal, a trend change to the opposite direction. The dragonfly doji, when appearing after a prolonged downtrend, signals a possible upcoming reversal to the upside. Examination of
the price action indicated by the dragonfly doji explains its logical interpretation. The dragonfly shows sellers pushing price substantially lower (the long lower tail), but at the end of the period, price recovers to close at its highest point. The candlestick essentially indicates a rejection of the extended push to the downside. The gravestone doji’s name
clearly hints that it represents bad news for buyers. The opposite of the dragonfly formation, the gravestone doji indicates a strong rejection of an attempt to push market prices higher, and thereby suggests a potential downside reversal may follow.
The rare, four price doji, where the market opens, closes, and in-between conducts all buying and selling at the exact same price throughout the time period, is the epitome of indecision, a market that shows no inclination to go anywhere in particular. There are dozens of different candlestick formations, along with several pattern variations.
Probably the most complete resource for identifying and utilizing candlestick patterns is Thomas Bulkowski’s pattern site, which thoroughly explains each candlestick pattern and even provides statistics on how often each pattern has historically given a reliable trading signal. It’s certainly helpful to know what a candlestick pattern indicates – but it’s
even more helpful to know if that indication has proven to be accurate 80% of the time. Technical Indicators – Moving Averages In addition to studying candlestick formations, technical traders can draw from a virtually endless supply of technical indicators to assist them in making trading decisions. Moving averages are probably the single most
widely-used technical indicator. Many trading strategies utilize one or more moving averages. A simple moving average trading strategy might be something like, “Buy as long as price remains above the 50-period exponential moving average (EMA); Sell as long as price remains below the 50 EMA”. Moving average crossovers are another frequently
employed technical indicator. A crossover trading strategy might be to buy when the 10-period moving average crosses above the 50-period moving average. The higher a moving average number is, the more significant price movement in relation to it is considered. For example, price crossing above or below a 100- or 200-period moving average is
usually considered much more significant than price moving above or below a 5-period moving average. Technical Indicators – Pivots and Fibonacci Numbers Daily pivot point indicators, which usually also identify several support and resistance levels in addition to the pivot point, are used by many traders to identify price levels for entering or closing
out trades. Pivot point levels often mark significant support or resistance levels or the levels where trading is contained within a range. If trading soars (or plummets) through the daily pivot and all the associated support or resistance levels, this is interpreted by many traders as “breakout” trading that will shift market prices substantially higher or
lower, in the direction of the breakout. Daily pivot points and their corresponding support and resistance levels are calculated using the previous trading day’s high, low, opening and closing prices. I’d show you the calculation, but there’s really no need, as pivot point levels are widely published each trading day and there are pivot point indicators
you can just load on a chart that do the calculations for you and reveal pivot levels. Most pivot point indicators show the daily pivot point along with three support levels below the pivot point and three price resistance levels above it. Fibonacci Retracements Fibonacci levels are another popular technical analysis tool. Fibonacci was a 12th-century
mathematician who developed a series of ratios that is very popular with technical traders. Fibonacci ratios, or levels, are commonly used to pinpoint trading opportunities and both trade entry and profit targets that arise during sustained trends. The primary Fibonacci ratios are 0.24, 0.38, 0.62, and 0.76. These are often expressed as percentages –
23%, 38%, etc. Note that Fibonacci ratios complement other Fibonacci ratios: 24% is the opposite, or remainder, of 76%, and 38% is the opposite, or remainder, of 62%. As with pivot point levels, there are numerous freely available technical indicators that will automatically calculate and load Fibonacci levels onto a chart. Fibonacci retracements are
the most often used Fibonacci indicator. After a security has been in a sustained uptrend or downtrend for some time, there is frequently a corrective retracement in the opposite direction before price resumes the overall long-term trend. Fibonacci retracements are used to identify good, low-risk trade entry points during such a retracement. For
example, assume that the price of stock “A” has climbed steadily from $10 to $40. Then the stock price begins to fall back a bit. Many investors will look for a good entry level to buy shares during such a price retracement. Fibonacci numbers suggest that likely price retracements will extend a distance equal to 24%, 38%, 62%, or 76% of the uptrend
move from $10 to $40. Investors watch these levels for indications that the market is finding support from where price will begin rising again. For example, if you were hoping for a chance to buy the stock after approximately a 38% retracement in price, you might enter an order to buy around the $31 price level. (The move from $10 to $40 = $30;
38% of $30 is $9; $40 – $9 = $31) Fibonacci Extensions Continuing with the above example – So now you’ve bought the stock at $31 and you’re trying to determine a profit target to sell at. For that, you can look to Fibonacci extensions, which indicate how much higher price may extend when the overall uptrend resumes. The Fibonacci extension
levels are pegged at prices that represent 126%, 138%, 162%, and 176% of the original uptrend move, calculated from the low of the retracement. So, if a 38% retracement of the original move from $10 to $40 turns out to be the retracement low, then from that price ($31), you find the first Fibonacci extension level and potential “take profit” target
by adding 126% of the original $30 move upward. The calculation goes as follows: Fibonacci extension level of 126% = $31 + ($30 x 1.26) = $68 – giving you a target price of $68. Once again, you never actually have to do any of these calculations. You just plug a Fibonacci indicator into your charting software and it displays all the various Fibonacci
levels. Pivot and Fibonacci levels are worth tracking even if you don’t personally use them as indicators in your own trading strategy. Because so many traders do base buying and selling moves on pivot and Fibonacci levels, if nothing else there is likely to be significant trading activity around those price points, activity that may help you better
determine probable future price moves. Technical Indicators – Momentum Indicators Moving averages and most other technical indicators are primarily focused on determining likely market direction, up or down. There is another class of technical indicators, however, whose main purpose is not so much to determine market direction as to determine
market strength. These indicators include such popular tools as the Stochastic Oscillator, the Relative Strength Index (RSI), the Moving Average Convergence-Divergence (MACD) indicator, and the Average Directional Movement Index (ADX). By measuring the strength of price movement, momentum indicators help investors determine whether
current price movement more likely represents relatively insignificant, range-bound trading or an actual, significant trend. Because momentum indicators measure trend strength, they can serve as early warning signals that a trend is coming to an end. For example, if a security has been trading in a strong, sustained uptrend for several months, but
then one or more momentum indicators signals the trend steadily losing strength, it may be time to think about taking profits. The 4-hour chart of USD/SGD below illustrates the value of a momentum indicator. The MACD indicator appears in a separate window below the main chart window. The sharp upturn in the MACD beginning around June 14th
indicates that the corresponding upsurge in price is a strong, trending move rather than just a temporary correction. When price begins to retrace downward somewhat on the 16th, the MACD shows weaker price action, indicating that the downward movement in price does not have much strength behind it. Soon after that, a strong uptrend resumes.
In this instance, the MACD would have helped provide reassurance to a buyer of the market that (A) the turn to the upside was a significant price move and (B) that the uptrend was likely to resume after the price dipped slightly on the 16th.
Because momentum indicators generally only signal strong or weak price movement, but not trend direction, they are often combined with other technical analysis indicators as part of an overall trading strategy. Technical Analysis – Conclusion Keep in mind the fact that no technical indicator is perfect. None of them gives signals that are 100%
accurate all the time. The smartest traders are always watching for warning signs that signals from their chosen indicators may be misleading. Technical analysis, done well, can certainly improve your profitability as a trader. However, what may do more to improve your fortunes in trading is spending more time and effort thinking about how best to
handle things if the market turns against you, rather than just fantasizing about how you’re going to spend your millions. Read more about Investing Thank you for reading CFI’s guide on Technical Analysis – A Beginner’s Guide. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources
below: