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Technical Analysis Categories
- Types of Charts
*
Bar Charts
*
Line Charts
*
Candlestick Charts
- Chart Reading
*
Trendlines
*
Resistance Levels
*
Support Levels
- Moving Average
* Simple Moving
Average
* Weighted Moving
Average
* Exponential
Moving Average
* Triangular Moving Average
- Momentum Indicators &
Oscillators
-
Rate of Change
-
Relative Strength Index
- Moving Averages
Convergence /
Divergences
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Price Oscillator
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Stochastic
-
Money Flow Index
-
Williams %R
-
Volume + Moving Average
- Stock Chart Overlays:
-
Bollinger Bands
-
Parabolic SAR
- Stock Chart Patterns:
*
Head and Shoulders
* V
Formations
* Double
Tops and Bottoms
* Triple
Tops and Bottoms
* Saucers
- Rounded Tops and
Bottoms
* Ascending,
Descending and
Symmetrical Triangles
* Channels
- Rectangles
* Rising
and Falling Wedges
* Bullish
and Bearish Flags
* Pennants
* Diamonds
* Cup and
Handle
* Pan and
Handle
* Spikes
* One-Day
Reversals
* Island
Reversal
- Dow Theory
- Elliot Wave Theory
- Spinella Heart Rate Theory
- Fibonacci
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Types of Charts
Using and understanding charts are important skills for maximizing the benefit of
trading decisions. In many cases, one or two dollars on both the buy and
sell sides of a transaction can make the difference between a good
investment and a marginal one. Most stock investors use the basic horizontal/vertical charts. The bottom axis represents the dates/time and the
vertical axis reflects the stock prices. Usually below the horizontal/bottom date axis is a separate comparative chart of volume statistics.
The three customary charts that are used by investors are as follows:
- Bar Chart
– This chart is useful when making short-term decisions.
The vertical line shows the highs and lows for the stock; the left
horizontal tic mark represents the opening stock price and the right
horizontal tic mark the closing price. It contains the same information as
a candlestick chart, except it’s harder to read.
– The line chart connects the closing stock prices from
period to period, and is a good depiction of the general trend of a
particular stock. Line charts are very useful in visualizing long-term
trends, but they do not address daily price swings.
– The nice feature of a candlestick chart is
that it is easy to read and informative. The candlestick format clearly
identifies if a stock closes higher or lower for any specific trading
session. The other unique features of candlestick charts are listed below:
- They clearly show the price momentum of a stock.
- The trading period is shown in a vertical rectangular-shaped box and
by the wicks that extrude from each end of the candlestick. The length
of the rectangular box reflects the opening and closing stock price for
the period. The tic marks that look similar to the wick of a candle,
extruding from the top and bottom of the rectangular box, represent the
stock’s high and low prices for the trading session.
- The rectangular box of the candlestick is called the real body.
It represents the distance (price difference) between the opening
and closing price for the trading session.
- The wicks of the candlestick are called shadows. The wick
extruding from the top end of the rectangular box (real body) is called
an upper shadow, while the wick extruding from the bottom of the
candlestick is called the lower shadow. The shadows reflect the
fluctuations between the high and low stock prices for the trading
period.
- If there are no wicks extruding from the rectangular box (real
body), it is called either a shaven head or shaven bottom.
The color of the candlestick represents whether a stock opened or closed
at its high or low for the period.
- The unique feature that has made the candlestick chart popular, is
that if the rectangular box is white or open, it indicates that
the stock’s closing price was higher than its opening price for that
period. If the rectangular box is black, then the closing price
was lower than its opening price.
- The prior trading session’s closing price does not necessarily
correspond to the next period’s opening price. Each trading session is a
separate event.
The diagram below is a typical candlestick chart, using Altria/Philip
Morris as an example. Altria Group, Inc. is a good stock with which to become
acquainted. It has had sharp price swings because of litigation issues, but has
always been able to bounce back. Buying on dips historically has been a
good strategy when investing in this company.
Reproduced with
permission of Yahoo! Inc.
ã 2004 by
Yahoo! Inc.
YAHOO! and the YAHOO! logo are trademarks of Yahoo! Inc.
To help them predict future price movements, candlestick investors
have developed specific terms for recurring chart patterns, such as:
doji, hanging man, hammer, umbrella lines, spinning tops, dark cloud
covers, and three black crows.
The candlestick chart is a very powerful tool because it’s visually
easier to read than the bar chart and is jammed packed with analytical
content. One can see from the above Philip
Morris chart, how the "ease of reading" feature of a candlestick can level
the playing field for investors who are not naturally detail- orientated.
The actual picture of a candlestick makes it easier for investors to
observe the trends and patterns of a security’s stock price. This
straightforward presentation can help investors clarify their trading
decisions and (hopefully) help maximize their returns by identifying,
early on, the direction of a trend.
Historically, the Japanese rice traders used candlestick charts in the
mid-1700’s, but it can be applied to almost any type of trading. The
current popularity of candlestick charts does not necessarily make them
better than the old fashioned bar charts.
Bookstores carry many titles on charting and technical
investing. Learning the language of technical analysis and chart reading can
be difficult and may initially seem overwhelming. Charts need to be kept in
perspective; they are one tool out of an arsenal of hundreds that people have
at their disposal when investing.
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