BQLearning: Reading A Stock Chart Simplified
A beginner’s guide to technical analysis.
BQ Learning is a special show that seeks to demystify financial markets, economic theories, legal processes and political structures.
In this series, we explain how technical analysis works, how to identify trading opportunities through it and decode various concepts associated with it.
Basic concepts of technical analysis
Trendline: It helps to identify the current trend of a stock or an index. A trendline is drawn by connecting the high and the low points of the stock price movement over a defined time frame.
Price Range: It’s a price band in which the stock tends to move. It could be an intra-day price range or a range over a period of time.
Volume Confirmation: Another crucial element while viewing price charts is the volumes supporting the price move. Technical analysis involves both price and volume.
Stop Loss Order: A stop loss order is placed with a broker to sell/buy a security when it reaches a certain price. Stop loss orders are designed to limit an investor’s loss on a position in a security.
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Support level: A support level forms the base of a security from where prices usually tend to bounce back.
Resistance Level: A resistance level is that point at which the rise in the stock price is halted and more number of sellers book profits.
Accumulation: Accumulation is the process by which an excess supply of stock is absorbed by rising demand. More number of buyers start accumulating the stock at various price points in an uptrend or at a time the stock is consolidating within a price range.
Liquidation: Liquidation refers to exiting a securities position or “booking out” as it is more commonly known. Another approach is to take an equal but opposite position in the same security.
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Breakout: A breakout is a breach of the previously recorded highs. It can be a price breakout or a volume breakout. It occurs when a stock’s price or volume exceeds the previous resistance level.
Breakdown: A breakdown is a price movement below an identified level of support. Traders sell a security when it breaks below a support level as a further downside is anticipated.
Gaps: A Gap is a break between prices on a stock chart. It occurs when the price of a stock makes a sharp move up or down with no trading occurring in between.
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What Are Price Bars And Candlestick Charts
Price Bar: A price bar defines trading action in a stock or security for a given time period. Analysis of price bars helps to identify a trend or range in which an underlying stock trades.
Candlesticks: A candlestick chart shows the price action like the price bar, the range between the open and close and the day’s high and low points.
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What Are Moving Averages?
Moving averages are used to gauge the direction of the trend but can’t be the lead indicator. It’s calculated by averaging a number of past price points. The resulting average is then plotted on a chart to smoothen a data set rather than focusing on day-to-day price fluctuations.
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The Significance Of MACD Indicator
The Moving Average Convergence Divergence, commonly known as the MACD, is an oscillating indicator. It’s used by traders to determine the trend direction, momentum and potential reversals.
The MACD is the difference between a 26-period and 12-period exponential moving average of closing prices. A nine-day exponential moving average, called the “signal line” is plotted on top of the MACD to show buy/sell opportunities.
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What’s Relative Strength Index?
The Relative Strength Index is a momentum oscillator that measures speed and change of price movements. Its movement oscillates between 0 and 100 and indicates whether a stock is ‘Overbought’ or ‘Oversold’.
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What Is A Doji Candlestick?
A Doji is formed when a stock’s open and close are virtually equal. The length of the upper and lower shadows—the high and low of the day, respectively—can vary, and the resulting candlestick looks like a cross.
Morning Star Doji: A Morning Star Doji is used by stock analysts to predict price movements of a security, derivative or currency over time. It comprises three candles—a large red candlestick, a small-bodied candlestick, and a green candlestick.
Hammer: A hammer is a price pattern that occurs when a stock trades significantly lower than its opening price, but rallies to close near its open.
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Significance Of A Shooting Star Candle And Engulfing Patterns
Shooting Star Candle: A shooting star is a bearish candlestick which is the opposite of the hammer candlestick. The price pattern comes with a long upper shadow and a small real body near the day’s low.
Bullish Engulfing: A bullish engulfing pattern forms when a small red candlestick is followed the next day by a large green candlestick. The body of the following candlestick completely engulfs the body of the previous day’s candlestick.
Bearish Engulfing: A bearish engulfing pattern forms when a small green candlestick is followed the next day by a large red candlestick.
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