There are many opportunities for everyone to make money in the financial markets. Of course, it is not simple to find the best opportunity, but if you get started in the right mode, the probability of success increase. Before investing in the financial markets, it is necessary to create a solid financial plan, to determine the risk profile, to analyze the assets, to create an optimal portfolio etc.
One of the most used methods by the traders to analyses the assets is stocks is the technical analysis. It is employed to evaluate every asset with historical trading data and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume. Let’s see now how to use the technical analysis to trade in the financial markets.
Types of charts
The main chart types used by technical analysts are the line chart, bar chart, candlestick chart, etc. They can be presented on an arithmetic or logarithmic scale. The types of charts and the scale used depend upon what information the technical analyst considers to be most important, and which charts and which scale ideally shows that information.
Supports and resistances
Supports and resistances are very important for the technical analyst. They are predetermined levels of the price of an asset at which it is thought that the price will tend to stop and reverse. A support level is a level where the price tends to find support as it falls. Instead, a resistance level is the opposite of a support level. It is where the price tends to find resistance as it rises.
A trend is the general direction the market is taking during a specified period of time and it can be both upward and downward, relating to bullish and bearish markets, respectively. By using the trend analysis, the trader tries to predict the future asset price movements based on recently observed trend data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future. There are three main types of trends: short trend, intermediate trend and long-term trend.
The volume analysis refers to the analysis of the number of assets that have been traded in a specified period of time. It helps the trader to determine the significance of changes in an asset’s price. For example, a significant price increase along with a significant volume increase could be a credible sign of a continued bullish trend or a bullish reversal. Adversely, a significant price decrease with a significant volume increase can be a sign for a continued bearish trend or a bearish trend reversal.
Oscillators varies over time within a band and are used to discover short-term overbought or oversold conditions. Common oscillators are MACD, ROC, RSI, CCI. They are typically used in conjunction with other technical analysis indicators to make trading decisions. Traders find oscillators most advantageous when they cannot find a clear trend in an asset price easily, for example when an asset trades horizontally or sideways.
Overlays varie over time and are used by traders to gain insight into the supply and demand of an asset. The main types of indicators used by technical analysts include moving averages and bollinger bands. Traders find indicators most advantageous when there is a clear trend in an asset price.
Japanese candlesticks are a technical analysis tool that traders use to chart and analyze the price movement of assets. The most used are: shooting star, hammer, doji, piercing Line, dark cloud cover, three white soldiers and three black crows.
In technical analysis, transitions between rising and falling trends are often signaled by price patterns. By definition, a price pattern is a recognizable configuration of price movement that is identified using a series of trendlines and/or curves. The main pattern prices types used by technical analysts are: double top reversal, double bottom reversal, triple top reversal, triple bottom reversal, head and shoulders, key reversal bar, triangle, flag and pennant, channel and cup with handle.