Technical Analysis
Technical Analysis is the study of chart patterns. Chart patterns give you a snapshot of where a market has been and knowing where it has been gives you a clue as to where it is going. A simple way to think of chart patterns is the same way a doctor looks at an X-ray. Chart patterns are a quick and easy way to see what's going on with a stock or an overall market.
Statistical trends are created from trading activity. These trends are seen through pictures known a charts. The trends are based on price movement and volume. Price movement is simply whether the trend is moving up, down or sideways. Volume addresses the number of trades placed during a given timeframe such as an hour, day, week or month.
Technical analysis operates from the assumption that past trading activity and price changes of a security can be valuable indicators of the security's future price movements. The basis for this is the notion that something in motion stays in motion. Therefore, a security in rising in price, or in an uptrend, will continue to rise. Conversely, a security declining in price, i.e., a downtrend, will continue to decline. There would need to be a powerful force, such as a problem is the company or the economy in general, to cause a trend to change direction.
Over the years hundreds of chart patterns and indicators have emerged, but ultimately only a few are worth truly understanding. Setting aside all the various intricacies of chart patters, the main thing you want to see is the direction of a stock or market. These directions are called trends and there are only three trends that can occur: Up, Down or Sideways (Flat).
This chart shows an Uptrend with rising prices from left to right:
This next chart shows a Downtrend with declining prices from left to right:
This last chart shows a Sideways or Flat trend from May 2018 to March 2019:
Generally, when looking to buy a stock, you want to see the stock in an uptrend. Each uptrend normally makes a pause, known as pullback or a base. This is a period of time where the stock takes a break from moving up. This break may look very much like a Sideways or Flat trend. Most strong stocks will have between three and five bases during the entire uptrend. You will normally want to buy a stock moving out of a first, second or third stage base. Sometimes you can buy when a stock breaks out of a fourth stage base, but the later the base stage, meaning bases four or five, have a greater chance of failing. This means you have a greater risk of losing money. To learn more about technical analysis and how it can be applied to your investing consider obtaining see below.