Chart analysis is for both investors and traders. It’s one of the basic things that you should learn before you start to make money. Without the basics of chart analysis, you will risk your money, and sometimes you enter the market at the wrong time.
Chart analysis was less popular a few decades ago. Some people even see it as something foreign. But those who made fortune out of it know how to use it and stand out of the herd. Now with enough information and knowledge, you can take advantage of it too.
The information on the candlestick consists of:
- The opening price of the chart is also known as the Open.
- The highest price of that period is also known as the High.
- The lowest data of that period is also known as the low.
- The closing price of the day is also known as the close.
Other than the candle data, the chart analysis studies the net volume, net turnover, and net transactions.
Net volume is the data of all the number of traded stock units in that given period. Suppose on a particular day person A buys 200 units of stock and person B sells 400 units of stock then the net volume is the number of stocks traded on that day which is 600 units of stock. Volume determines the popularity of stock.
Net turnover is the data on the total amount of money traded at a particular time. Compare it with volume. Volume is the data of the number of traded stocks and turnover is the total price of the traded stocks. Suppose on a particular day person A invests 2 million dollars and person B sells 4 million dollars from their stock portfolio then the total turnover in the stock market for that day is 6 million dollars.
The net transaction is the data of how many times the stock units have been bought and sold in a particular time. Suppose person A buys 10 units of stock 10 times on a particular day and person B sells 10 units of stock 5 times then the total number of transactions for that particular day is 150. The net transaction also determines the popularity of the stock script.
Trading vs Investing.
It is not a topic to debate. Both are important and the genius investor is sometimes a trader as well. Time changes all narratives, however in the early 90s the term “buy and hold” was popular, it still is popular today but with the rise of technical analysis, people can profit from the margin and re-invest again. The logic is if you lose your trade, you become an investor from one point of view, but always remember that true investors are visionary and shrewd in their actions. Some investors in bitcoin had predicted the 50k dollar growth, and other investors had predicted the stock of Apple in the 90s. Today the stock volatility has risen.
Here are the two charts. Chart A and Chart B.
Chart A shows that investors can profit from holding.
Chart B shows that investors cannot profit from holding.
Basics of Chart Analysis: Three types of Chart
Here are the three types of charts that you need to know about.
(a) Bar Chart
As mentioned above it consists of the Opening price, High price, low price, and closing price. Below is the traded volume in that period which investors and traders take a close look at before putting money in the market.
(b) Candle Chart
A candle chart is a standard for stock analysis, and it represents red and green candles. It is the same as the Bar chart where the upper line is high and the lower line is the low price of that time. The dark color can be taken as a red candle and the white is taken as a green candle here.
(c) Line Chart
The line chart is the data drawn from the previous closing price. It depicts the same movement as the candle chart.
Chart Patterns Basics
In addition, this post will talk about successful chart patterns. Please keep in mind that these are the basics and one should know about all these patterns before diving into the more complex chart.
What is Support?
When a stock drops, it drops in a pattern and creates support. The support is the area where the price doesn’t go below it. It’s called a bottom as well with the rise of buyers. Looking in more detail when the stock price starts to fall it creates more than one support, the final support is the final bottom. Therefore there will always be a support level1, support level 2, and more.
What is Resistance?
Resistance is the area in the chart where the price hits its limit, it doesn’t go any higher. In other term, the point of resistance is the top of a stock script. As the price rises, the chart pattern breaks the previous top and makes the new top which is also a new resistance point. Many traders mark the point of resistance and name them as Resistance 1, Resistance 2, and more.
What is a Pivot Point?
The previous support point and the previous resistance point is the Pivot point in the chart analysis. It is not constant and it changes with the change in market trends. When the market is in the bear, the final support point is the pivot point and in the bull market, the final resistance is the pivot point. The pivot point is important because it indicates the market trend.
The Saucer formation
Among the many chart patterns, the saucer formation is the most important. The one who can look in-depth and see the real arc knows that trend reversal is on the way. However, the pattern can also be a sign of the short-term gain but if the chart breaks the resistance point, the large gain is absolute.
The Fibonacci pattern uses a mathematical value in the stock chart analysis. The mathematical value comes from the work of Leonardo Bonacci. He depicted that the value is found everywhere in nature and the numbers 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, and so on (Fibonacci sequence) is the key principle of the universe.
In the early 1930s, Ralph Nelson Elliott used the Fibonacci sequence in his analysis of stock charts, which he named Elliot Wave Theory. Nowadays, The Fibonacci tools exist to determine the support and resistance in a particular time frame. The lines use the Fibonacci sequence to point out the value. Most traders use ‘The Fibonacci pattern’ as a tool to predict the future candle stick.
The Fibonacci pattern also uses the golden ratio by multiplying or dividing the previous top or bottom price by 1.61. However, it’s a theory and one should carefully analyze the data in stock charts.
The value of the volume is important to determine the flow of the chart movement. Expert traders analyze them in a peculiar fashion. The spike in volume can be a sign of trend reversal.
Most of the time, when the volume spike falls off the market goes down. But it is essential to understand, sometimes the price does not follow the volume trend. Volume is one of the key indicators and traders are skillful to time the market. When big investors enter at such a time, the market takes an upward momentum.
For the analysis of bullish stock patterns, please read methods to identify a bullish trend in the stock market.