A beginners guide to technical stock analysis

There are many kinds of stock trading indicators. Some are just derived by analysing the trading charts of the stock prices. Many technical analysis methods are complicated and seem to have no underlying basis. However, there are some simple rules of technical stock analysis that are easily understood, and are underpinned by reasonable assumptions about the psychology of traders.

What is technical analysis?

Technical analysis involves comparing the movement of a stock's price up to a given time with the movement after this time. Several patterns stand out, and technical traders use these to determine what stocks will go up or down. Fundamentals of companies Technical analysis totally ignores the fundamentals of a company: revenues, earnings, debt, and profit margins mean nothing to a strict technical analyst. Many traders pay attention to both fundamentals and stock chart patterns.

Some simple stock chart patterns

Moving averages The 200-day moving average is considered as an important line for a stock's price. If the stock trades below the moving average, this average is considered "resistance". The stock price will have trouble breaking through to the upside. Similarly, if the stock trades above the 200-day moving average, then the line is considered "support," and the stock will not easily break through the line to the downside. In addition to the 200-day moving average, many analysts closely watch the
50 and 100-day moving averages. Head and shoulders This is a pattern that is considered very bearish by technical analysts. It looks like what it sounds like: a pattern where the stock price rises to a local top, falls off, then rises to a higher top, falls again, and makes another local top about as high as the first one before falling again. The pattern is supposed to look like a person's head and shoulders. Occasionally, a head and shoulders "fails." The stock, instead of diving, resumes an upward trend. A failed head and shoulders is considered very bullish. Support and resistance levels Besides the moving averages, historical tops and bottoms, are considered important. If a stock has traded up past its moving averages several times, but each time fails to break through some level, that price is considered resistance. Similarly, if the stock always seems to turn upward when it reaches a certain level on the downside, that price is considered support. Technicians will expect the stock to trade between the support and resistance levels - in a channel - until some catalyst allows it to break through one way or the other. Then, analysts believe that it will continue moving in the direction of the breakthrough.