Firstly, I’ll share my short story of the shift from fundamental analysis to technical analysis of stock trends. In starting my career in the equity market, I started with fundamental analysis. After nine months of struggle, I didn’t earn a single penny from financial markets. And then what?
Technical analysis came into my life.
I tried technical analysis and chart reading, and in a single month of September 2021, I made 70% returns in a month from one stock. That trade, which is based on technical analysis, boosted my confidence, and then I adapted technical analysis. And more especially, I chose my career in the equity market as a pro-swing trader.
Let’s start the guide in a simple manner:
What is Technical Analysis of stock trends?
Technical analysis is a simple tool to identify and predict the price movement with the help of historical data in financial markets. Modern traders and investors mostly use technical analysis to study market trends, chart patterns, and volume in the financial markets. Technical analysis is applicable to stocks, currencies, commodities, cryptocurrencies (Bitcoin), indices, and many other markets.
There are four keys to mastering technical analysis for beginners.
a). Identify The Trend
b). To Draw Support and Resistance
Technical Analysis of stock trends: Types of trends
An uptrend or a rising trend describes the movement in the price of a stock, index, or any financial asset when the overall direction is up. Which makes it a Bullish market.
The graph helps us compare the lows and the higher lows & highs and the higher highs. It is this very formation of higher lows and higher highs that is called an uptrend market.
Similarly, the market that continuously forms a structure of lower lows and lower highs is termed a down-trending market.
A sideways market is called a range-bound market or a choppy market and is sometimes also known as a consolidating market.
When a market goes up and down, and repeats, and goes up and down again, forming an almost horizontal line touching the high points or the low points, the market is known as a sideways market.
To Draw Support and Resistance
The support and resistance (S&R) are specific price points on a chart expected to attract the maximum amount of either buying or selling. The support price is a price at which one can expect more buyers than sellers. Likewise, the resistance price is a price at which one can expect more sellers than buyers.
Support– An area or “zone” on the chart with potential buying pressure to push the price higher.
Resistance – An area or “zone” on the chart with potential selling pressure to push the price lower.
How to Draw Support and Resistance Lines on a Candlestick Chart?
Drawing Support and Resistance is very easy if you just follow the basic rules and not be so mentally rigid. I tell you how I draw support and resistance.
- Zoom out the chart (compress the chart), whatever time frame you have.
- Mark the swing highs and swing lows( wicks of candles) starting from today and go leftwards.
- Connect all the points where at least two swing high or swing low connect.
- The more points connect, the stronger that support or resistance zone is.
Pro Tip: Remember……Support & Resistance is not a single line, but an area or “zone” on the chart. And when price breaks Support & Resistance, a role reversal occurs in technical analysis of stock trends.
Volume is the Key in Technical Analysis of stock trends
Volume simply shows the number of shares or contracts traded in a particular script in a given period of time.
Why does volume play an important role for technical analysts?
Let’s take an example. If you find the price moving up in any script (let’s say: A), and then you check that there is also a high volume (volume indicator) in script “A”. So, logically, it means there is something big buying happening. That’s why it confirms the direction of price is true.
With the help of volume, you can use volume as an indicator to get more confirmation in your trade, and with the help of volume in technical analysis of stock trends, you can identify the big players.
Charts in Technical Analysis of Stock Trends
Here are some of the basic concepts that you will need to know:
Each bar represents price performance for a specific period. These periods may be as long as a month or as short as a minute, daily bars being the most popular.
OHLC stands for the 4 elements displayed on a typical price bar:
O: opening price;
H: highest price;
L: lowest price; and
C: closing price.
The trading chart displays information that can help you decide when to enter and exit a position. There are many kinds of trading charts:
– Bar charts,
-Point and figure and
We’ll focus on candlesticks, one commonly used chart type.
A candlestick graph combines a line graph and a bar graph. Although you can switch chart styles based on your own viewpoint, most traders like candlesticks. Within your chosen time frame, each candlestick provides you with four important bits of information.
Example: If you choose the Daily time frame, it displays the Open, High, Low, and Close prices for the entire trading session/day.
These price levels, known as “Open” and “Close,” serve as useful benchmarks for assessing market strength and helping to identify key price points that can support trading concepts.
The only chart pattern we use in our stock trading to find multibagger stocks is “CUP PATTERN”.
If you want to learn how to trade the cup pattern, you can use the following ebook:
Advance Implementation in Technical Analysis of Stock Trends: Indicators
There are a lot of indicators like moving averages, RSI( relative strength index) , Bollinger Band etc. But the major indicator is the “Moving Average”.
The ONLY indicator that you should learn: Simple Moving Average
Simple Moving Average:
The SMA Is the simplest moving average (I use 20 SMA) that is obtained by adding the most recent data points set and then dividing the total by the number of time periods.
For example, a trader wants to calculate the SMA for a stock by taking its closing price for the last five days.
The closing prices for the last five days are as follows: 100, 101, 105, 110, and 107.
The SMA is then calculated as follows:
SMA = (100 + 101 + 105 + 110 + 107) / 5
SMA = 104.6
Is there any calculation required by me for SMA?
The answer is no. A broker will provide you with a charting platform and all the tools you need for trading and investing.
We get a commission when you buy a product via our affiliate link at no additional cost.
Is there anything special about 20 SMA?
The answer is no. I use it because it fits my trading style. Ultimately you need to find something that suits you.
20 SMA: to calculate a script’s 20-day SMA, the closing prices of the past 20 days would be added up, and then divided by 20.
Conclusion of technical analysis of stock trends
In this world of financial markets, there are many successful traders and investors based on technical analysis as well as on fundamental analysis. But you have to identify which style suits you. According to me, for the ordinary man, technical analysis is simple.I tried to explain basics of technical analysis of stock trends.
I hope you’ve enjoyed this information as much as I loved writing it for you. I appreciate every one of you for taking time out of your day to read this, and if you have an extra second, then share this guide with your fellows.
If you have some doubts or queries, ask in the comment section.
Thank you. I wish you joy and abundance in all you do.