Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements. Like weather forecasting, technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is “likely” to happen to prices over time. Technical analysis uses a wide variety of charts that show price over time.
Technical analysis is the interpretation of the price action of a company’s underlying stock (or any tradable financial instrument). It utilizes various charts and statistical indicators to determine price support/resistance, range and trends. It identifies historically relevant price patterns and behaviors to help forecast the potential direction of the stock. This methodology focuses only on the price of the shares, not the operations of the company.
Fundamental analysis focuses on the intrinsic value of the market. If the market price is below the intrinsic value, then the market is undervalued and should be bought or vice versa.
The technical analysis concentrates on the study of market supply and demand.
Prices are rising if the investors think that the market is undervalued and then they buy. Price are falling if the investors think that the market is overvalued and then they sell. Because some part of the prices is based on the investorʼs expectation or overreaction, the prices do not always properly reflect the intrinsic value.
People who are inside the business field usually know about their business better than people on the outside.
The judgment of people inside must be quicker and more accurate than the outsider. And the investment activities of such people inside have been recorded as the movement of the prices and the trade volume.
So, if you analyze the details of such movement and volume, you might find the movement of the antecessors.
The fact that the big change of the prices influences strongly to the investors applies to the people participating market at any time and in any situation.
The history repeats itself.
Technical analysis focuses on the movement of the prices and the trade volume and tries to forecast the future movement of the prices.
The technical analysis concentrates on the change of the prices, and therefore you would know the timing of buying and selling, but not on the intrinsic value, and therefore you would not know whether you were properly investing.
We have found that both fundamental analysis and technical analysis have strong points and weak points, and therefore if we use the strong points of both analysis, we might be able to become the ever winning investors.
When we look into price movements of a certain stock and other financial assets, we usually use the so-called candlestick charts.
A candlestick chart is a style of bar-chart used primarily to describe price movements of a security, derivative, or currency over time. It is a combination of a line-chart and a bar-chart, in that each bar represents the range of price movement over a given time interval. It is most often used in technical analysis of equity and currency price patterns.
They appear superficially similar to error bars but are unrelated.
Candlesticks are usually composed of the body (black or white), and an upper and a lower shadow (wick): the area between the open and the close is called the real body, price excursions above and below the real body are called shadows. The wick illustrates the highest and lowest traded prices of security during the time interval represented.
The body illustrates the opening and closing trades.
If the security closed higher than it opened, the body is white or unfilled, with the opening price at the bottom of the body and the closing price at the top. If the security closed lower than it opened, the body is black, with the opening price at the top and the closing price at the bottom. A candlestick need not have either a body or a wick.
To better highlight price movements, modern candlestick charts, especially those displayed digitally, often replace the black or white of the candlestick body with colors such as red, for a lower closing, and blue or green, for a higher closing.
Every trader or investor should draw his or her own chart.
How to do that? How to draw?
We did it as you can see above.
First, draw the vertical line from the highest price to the lowest during the day. Then, draw the rectangle shape from the open price to the close price over the above vertical line. And if the close price is higher than the open price, this rectangle shape is shown in white and if the open is higher, it is shown in black. This white line is called “the sunny line” and the black line “the shadow line”.
And this rectangle shape is called the ”real body”.
The line between the top of the real body and the highest price on that day is called the upper shadow and the line between the bottom of the real body and the lowest price is called the lower shadow.
This shadow is sometimes called “beard”. Because the principal movement is the movement between the open and the close, this movement is drawn as the real body and because the shadow is the rather extra movement to reflect the adjustments of the overshooting, it is drawn as one line.
A candlestick tells us various things.
For example, the length of the real body tells us the strength of the momentum of both seller and buyer. When the buyers are stronger, they keep buying and the white real body becomes longer, and when the sellers are stronger, they keep selling and the black becomes longer.
The unusual long big real body is appearing occasionally once a month or two months when the movement becomes 2 to 3% of the price. You have to know that the usual average movement is around 1%.
The long real body and the short shadow simply tell us that the majority of the investors have followed the strong movement of the price and show their momentum.
But sometimes it is possible that they have been ended up with overshooting the market. When both the real body and the shadow are short, it tells us that the momentum of selling and buying is almost equal or investors see the market on the sidelines with no clear direction, or nobody is interested in the current market and leave it as it is.
The unusual short small real body is appearing, when the price movement is contained in the range of 0.5% or under of the price and this also appears once a month or two months.
Insert image price movement of a day (it’s just a suggestion, but should look like this with all elements included)
The long shadow should also be paid attention to. The average length from the highest to the lowest is 2 – 3% of the price. So, if the length of the upper or lower shadow is more than this level and the length of one shadow is more than a half of the total length, it must be quite seldom and should be paid attention to.
It is said that the long shadow generally tends to move against the shadow.
For example, the long lower shadow means that the price being sold heavily eventually returned to the level of the open, and at the end, the power of the buyer became stronger than the seller.
Hence, the buying power might be kept strong on the next day.
On the contrary, the long upper shadow means that the price being bought finally pushed to the open level, and the power of the seller was stronger than the buyer, then the market would be kept low on the next day.
This explanation is rather reasonable, there can be a pitfall. How do we explain the situation that, first the long shadow comes, then the short shadow appears? It closed facing toward the long shadow, then, contrary to the above, it looks that the price tends to move toward the long shadow. But no one can tell which shadow is made first.
What is the truth?
According to the statistics, the upper shadow often appears in price upward phase and the under shadow often appears in price downward phase.
In reality, the price is likely to move toward the long shadow.
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Technical analysis is based on:
Technical analysis is focused only on
The technical analysis concentrates on the change of the prices to provide the investor with the information