What is technical analysis?
It is the study of the movement of markets, using price and time as data. This data is plotted on a graph so that it can be analysed together.
Technical analysis gives us information for decision making and also helps us to understand the movements and how investors are reacting to events that happen in the world, for example if a CEO of a publicly traded company resigns, it will surely be reflected in the movement of the stocks of that company.
Technical analysis is based on:
It is necessary to know the price variation of an asset in order to make a graphical line. It is the protagonist of a chart and it is on the right side. You can see all the prices that a company has had in a certain period of time just by looking at the graph. The time is represented on the bottom horizontal line.
This is the amount of transactions that take place in a certain period of time. Below the price, it is most common to place the volume chart. Many traders do not take volume into account when making their decisions, and this is a mistake.
While it only tells us how many trades have been made, it tells us whether the current trend is accelerating or not, and that is where it becomes relevant. It is usually represented by vertical bars.
Here we show, thanks to the TradingView tool (it has a free version, we invite you to try it) a chart where we show the price, volume and time scale.
Figures that appear on the charts:
As you can see on the TradingView chart, in the larger space where the prices go there are some coloured “sticks”. They are called candlesticks or Candestlick. It is a rectangle, which is called a body and represents the difference between the opening and closing price. The protruding lines, called wicks, represent the high and low price.
Green and red bodies are usually used, although you can use any body you wish. The green bodies are bullish candles, meaning that the price opened at a level, and then rose and closed higher than the initial level. And the red body means that the closing price was lower than the opening price, so it was down.
Note that the closing or opening price does not always coincide with the highs or lows.
It is important to know that each Japanese candlestick represents a time period, depending on the time scale you are looking at. In the chart example above, each candlestick represents 1 day, as it is a daily chart. But if you do day trading and use 5 minute charts, each candlestick will represent 5 minutes, and the same in case you look at monthly charts, each candlestick is a month.
There are other types of price patterns, but most traders use the Japanese candlesticks as they are the most recommended.
It is important to keep in mind the following:
Markets discount everything
Events related to a company, whether good or bad, generate a reaction in investors that causes their stocks to change price. It is said that they discount everything because it is immediate, sometimes even just on the basis of a rumour. In other words, there is an anticipatory reaction.
Price reflects the negotiation between buyers and sellers
I.e. how volatile the stock is, how quickly a company changes price. It is said that price is king, and you will realise why. The price determines what you can expect from that stock, for example if you want to invest for the long term, you need something stable but if you want to do day trading you need something more volatile, because if the price moves slowly it goes against that strategy.
Prices move by trends
There are three trends, an uptrend (the share price goes up), a downtrend (the share price goes down) and a sideways trend (it moves within a range but without a defined trend).
Markets are cyclical
Price movements do not go in a straight line, so everything that goes up then goes down, and vice versa. Nothing is linear in the stock market, even if a share has an upward trend, it has its downward days, it is cyclical.
History always repeats itself, there are patterns that some stocks have that tend to occur, and you will notice that with observation. For example, there are tourism companies that react almost always the same in the different seasons of the year.