Basic Stock Charting Patterns - Trends, Floor, Ceilings and Other Patterns of Technical Analysis

I don't do a great deal with charting. While there are some who search through charts for price patterns, I've found that charting is useful for telling you where you are, but not that useful for telling you where you are going. Nevertheless, every investor should know the basics about charting, if for no other reason than to understand what other people are looking at and the predict their reactions. Here are some of the basic definitions that every stock investor should know:

Chart: A chart is a graph of price over a period of time. The most basic form of a chart is a line chart, which consists of a plot of the closing prices. A more useful chart is a OHLC chart, which plots the Open, High, Low, and close for each day (or week or month). This chart is more useful since it shows where a stock traded during the period, rather than just a point in time, which tells more of the story. Candlestick charts, which as colored or open boxes depending on whether the stock moved up or down during the day, are another refinement.

time frame: There are different time frames, which correspond to the length of time represented by each point on the chart. For example, a chart that plotted a point each 15 minutes, and spanned a day, would be a very short-term chart. A chart that plotted one point per day and extended a couple of months would be a short-term chart. An intermediate-term chart would have points that represented a few days or so and cover several months. Finally, a chart where each point was a week or a month, and covered a few years to a decade, would be a long-term chart. I'm typically concerned with the long-term trends, so I look at charts of several months to a few years or a decade in length.

Trend: A trend is the current movement of a stock. A stock will always be in an uptrend, downtrend, or drawing lines. We'll cover these in a later post.

pattern (Bull or Bear): Certain patterns are commonly seen that foreshadow specific price movements. One that would indicate the stock is ready to go up would be a "bull pattern"; one that indicated a decline in price a "bear pattern".

floor or support level: A price at which the stock traded at for a while before moving higher. When the stock hits that price, it tends to not move below it.

ceiling: The opposite of a floor. Here the stock price is below the ceiling, and it may be difficult for the stock to get above the ceiling.

moving average: An average in which the closing price for a specified number of days are added together and averaged. Each day a new day is added and the earliest day in the average dropped. Moving averages tend to smooth out the price of a stock and provide a clearer picture of what is happening. Also, a stock above its average may be pricey, one below it inexpensive. A 90-day moving average is a commonly used average.

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The Disadvantages of Technical Analysis For Stock Trading

Many traders use technical analysis for trading stocks. Technical analysis is very attractive because it is based on math and statistics, thus giving the illusion of accuracy and predictability. However, technical analysis has several flaws and traders should be aware of its limitations.

These disadvantages include:

1. At their heart, all technical indicators - no matter how complex - are based on price, which always reflects what has already happened in the market. Thus, technical analysis is reactive - not truly predictive of what will happen.

2. Today's markets are much more chaotic and choppy compared to previous decades. This is because of hedge funds and computerized ultra-stockstackup.com" title="short term trading">short term trading activity. The result is more false signals and ill-formed patterns from technical analysis techniques.

3. The bulk of technical traders still rely on a handful of indicators first created in the 1970's. This results in their overuse and, thus, the markets adjust and render them less effective.

4. The majority of technical traders attempt to do trend-following. While trend following techniques can make big money over time, they have a low accuracy rate and a high draw down (most trades are losses and its not uncommon to be down 50-60% at some point). Most traders can not handle this psychologically. They end up overriding stockstackup.com" title="Trading Signals">Trading Signals and/or switching between systems.

5. Classical trading chart patterns can be found in graphs of non-market related activities, including temperature charts. Also, chart patterns can appear and disappear depending on the scaling of the chart. This strongly suggests that chart patterns are a trick of the human eye and have no predictive value.

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Technical Analysis in Stock Market Trading

The methods used to analyze securities (stocks) and make investment decisions are vast, but tend to fall into one of two categories known as fundamental analysis and technical analysis. Fundamental analysis involves researching and evaluating the characteristics of the company including the evaluation of company financial statements in order to approximate the value of a company. Technical analysis, on the other hand, pays no attention to the value of a stock and cares more about price movements based on general market psychology and historical trends.

There are numerous charting indicators available and over time I will attempt to discuss and educate our readers on these types of indicators and how to read them for important data. However, for the scope of today's article, I simply wanted to introduce our readers to the basics of technical analysis and how it can be helpful when completing due diligence on investment or trading opportunities. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor.

Technical analysis can be defined as a method of evaluating future security prices and market directions based on statistical analysis of variables such as trading volume, price changes, trends, patterns, and formations in charts. These formations within the charts are, as believed by technical analysts, said to be in large part dictated by the psychological makeup of the market.

Through the use of charting, analysts attempt to explain the supply and demand of a security and help in determining the emotions of those in the market. Technical analysis is based on the basic theory that the price of a stock reflects everything that could or has affected a stock. Therefore, fundamental factors as well as economic factors like the overall psychology of the market are all priced into the stock, which leaves only the analysis of supply and demand in predicting the price movement of the forecasted stock.

Analysts believe that future prices are dictated by previously established trends, attributing the repetitive nature of these trends to the basic makeup of the markets psychology. They believe that market participants tend to react in common ways to events within the market, therefore through the use of technical charting, patterns can be used to analyze price movements and understand these trends.

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Live Stock Technical Analysis - Guide to Success

For a layman, stockstackup.com" title="share trading">share trading can just be selling or buying of shares like nay other product, but for a trader or precisely an investor, trade becomes a priority consideration. They invest huge amounts of money into the stockstackup.com" title="share market">share market attempting to reap up great profits in the longer run. Till their accounts wither, they live in a hope to see augmenting profits and nothing else. Coming out of the general concept, stockstackup.com" title="share trading">share trading also impacts a country's economy largely. A nation relies on how the international or local operations in the market perform.

A trade is thus, declared to be profitable and successful if it translates into a gain of the GDP and that indicates the thriving economy of a country. However, behind this smiling profitable story trading lays extensive study and stock technical analysis. For instance, in the Indian stockstackup.com" title="share market">share market, Nifty and BSE sensex are the index or indicators giving a clear idea of the market situation and also whether it is the right time to invest or not. 

This technical analysis completely thrives on finance and investments and is an elaborated study of the share market, study of an asset, price action to predict profitable movements in the market. These often guide an investor to make great profits. With the internet spreading its wings on all aspects of business, share market too does not lie unaffected. Share brokers have their helplines open online where online share trading is carried on. A number of trading websites like Nirmal Bang shelters trading experts and also provides ample information on Indian mutual funds and the functioning of stock markets BSE and NSE.

What is used as a tutorial is a well blended experience guides where the pasta and present market fluctuations are studied upon and accordingly the new strategies are devised. This can help one arrive at a price well-established trend too and can make decisions based on one's own intuitive mind. A true stock technical analysis is one which teaches you to look into the market and decide accordingly which would be the most cost effective way to trade the shares.

Nirmal Kumar Soni is freelance market analyst and is writing reviews articles on stock share market, stock technical analysis, share market and information on stock market.

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Why Fundamental Analysis & Technical Analysis Are The Same

For years, I have been asked this same question over and over again, "Which is better, fundamental analysis or technical analysis?".

For decades, analysts of one camp argued about the ineffectiveness of the other and provided reasons and evidences how one method of analysis can be used at the exclusion of the other. For decades, fundamental analysts; people who dig deep into the business model and financial statements of companies, gave proof to the ineffectiveness of technical analysis. For decades too have technical analysts; people who read charts to find trends, patterns and investor behaviors, gave proof to the ineffectiveness of fundamental analysis.

Suddenly, it feels like there are 2 different worlds existing simultaneously, talking about the same stocks, same markets with views that are supposed to have nothing to do with one another. How is that possible?

If fundamental analysis is truly ineffective, why have fundamental analysis existed for so many centuries? If technical analysis is truly ineffective, why are technical analysis and chartists still paid so much money in Wall Street? If fundamental analysis is ineffective, why does earnings releases move stocks so much? If technical analysis is ineffective, why do resistance levels and support levels prove to be accurate time and time over again? What if both methods are truly one and the same thing?

Yes, fundamental analysis and technical analysis are really two sides of the same coin, two perspectives on the same issue and two components making up a full picture.

Fundamental analysis explores 2 main issues; Earnings expectation and Growth expectations. The ultimate objective of fundamental analysis is to arrive at an opinion on the future profitability of a company and how much that profitability is worth in terms of stock price. The higher the earnings expectations and growth expectations, the higher the stock price ought to be. However, scientific as this may be, it is missing the final element that moves stocks... investor sentiments or how much investors think that earnings and growth expectation is ultimately worth! Technical analysis reflects the final verdict of investors towards that earnings and growth expectation. Without this final verdict, all analysis is meaningless. However, this final verdict may not always be inline with your own expectation towards the future profitability and growth of a company. Because both fundamental analysis and technical analysis is really the same thing, a decision to buy or sell a stock should take both views into consideration. When fundamental analysis revealed a potential rise in earnings, does the charts support that view? Have investors started moving ahead of the news? Does the trend so far reveal that investors are not impressed with that outlook at all? When a reversal signal turns up in technical analysis, is there any fundamental reasons driving that reversal? Is it just nothing but an unsustainable exuberance not supported by fundamental reasons?

That being said, when a company's fundamental outlook is continuously strong over a long period of time, technicals will also reflect that same long term strength through long term bullish trend and patterns.

In this sense, fundamental analysis and fundamental analysis are truly one and the same and nobody can do with one and not the other. It is like examining the physical attributes of a boxer versus his track record. You cannot have a complete picture of the capabilities of a boxer unless you take both views into consideration.

Because fundamental analysis and technical analysis are 2 different views on the same subject, they both have certain strengths over each other.

Fundamental analysis is capable of telling if a company has long term growth potential and whether or not its stocks are worth while long term investments. However, fundamental analysis is incapable of predicting or explaining short term trends of a few days that are not caused by fundamental company events like earnings release. Technical analysis on the other hand is capable of telling when prices are out of sorts and when prices shouldn't rise or fall anymore using support and resistance levels. Such knowledge is extremely useful in trading short term trends. However, technical analysis has proved to be ineffective at predicting long term price actions as business fundamentals does change significantly from year to year.

I hope I have resolved the feud between fundamental and technical analysis today and that you have understood that both are really the same thing, talking about the same thing while providing a slightly different perspective. I hope you will embrace both methods from now on and use the right bias on the right investment horizon and outlook. I personally use both analysis in my stock options trading and I would turn the bias towards technical analysis in my short term trading System">short term trading System, the Star trading system.

Jason Ng is the Founder and Chief Option Strategist of Masters 'O' Equity Asset Management ( MastersoEquity.com ) and author of OptionTradingPedia.com . He is a fund manager specializing in options trading and his revolutionary Star Trading System has helped thousands.

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Stock Analysis - Technical vs. Fundamental

There are two different methods most stock traders employ to analyze a stock as a potential investment and each is a different from the other as night and day. In fact, the subject has caused more than one healthy debate between successful traders and investors and will likely continue do so for quite some time. Fundamental vs. technical analysis, which is the best way to trade? First, I have to admit I am a devout technical analyst. I write about the subject and own a company who publishes a technical analysis stock stockstackup.com" title="Trading Course">Trading Course. I didn't start out in the stock market that way but gradually came to the conclusion I understood technical criteria better than fundamental criteria. Even though I believe that technical analysis leads to more profit, less loss, and is easier to understand, I do leave room for possibility that there are investors who perform just as well as I do using fundamental analysis.

Fundamental analysis is the study of the financial condition of a publicly traded company. When you visit a financial website such as MSN Money, Yahoo Finance or CBS Market Watch and enter a stock symbol, the information that will be displayed is mostly fundamental criteria. It includes figures such as gross sales, gross profit, sales growth, income growth, net profit margin, debt to equity ratio, institutional analyst recommendations among other various criteria. The fundamental analyst compares these numbers to those of other companies in the same industry group of against the S&P 500 average and decides if the stock is worthy of being added to his of her portfolio.

Many fundamental analysts are buy and hold investors. They're willing to add a stock to their portfolio and wait until the investment matures, which is different than most technical analysts. Fundamental analysts by nature are patient with their investing approach. They may hold an individual stock for years, allowing it time to gain a return (hopefully) and in some cases reap the dividends the stock may or may not pay.

Technical analysts decide which stock they will invest in based on criteria they see on a stock chart. The technical analyst believes that the stock chart also charts the mood of the specific market. To put it another way, the stock chart gives the investor a peek into the market psychology. While large financial institutions and brokerage houses recommend stocks to their customers based on fundamental criteria, they all have traders on the floor who honor technical criteria on a daily trading basis. You can actually watch technical rules being "obeyed" on an intraday chart as the price forms patterns indicating the stock is losing steam or there is strong buying taking place. These intraday patterns are traded by stockstackup.com" title="day trader">day traders but the same rules apply to daily charts and allow the technical analyst the ability to read market psychology in charts of many time frames.

The technical analyst uses the daily chart to forecast his or her trades. The different continuation, topping, bottoming and reversal patterns are to numerous to list in this article. Most technical traders buy on a price breakout and sell on the first pullback or consolidation in price. The breakout is forecast on the chart and the entry is strategically timed to a precise buy point. It takes some study and training but the rewards are great and quick.

The technical analyst is usually impatient and not willing to keep their money tied up in a stock for very long. Most usually hold for less than a couple of months, with a couple of weeks being more common. The trade is placed only to "ride the wave" and the position is exited once the wave is over.

If you haven't begun to trade stocks and are thinking about starting, you need to decide which way YOU feel comfortable analyzing and trading stocks. It's a personal decision based on what you feel comfortable with. Technical traders are usually a little more aggressive in their approach to trading stocks than their fundamental counterparts. Either way is ok as long as you are willing to put the time into studying your craft.

B.M. Davis is an active trader and publisher of the Market Master Stock Trading Course. If you would like more information about candlestick charting or stock trading please visit http://www.market-masters.com

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