There are several more technical tools in use for trading stocks than those mentioned below. Therefore, this article aims to provide a basic yet informative description of three of the most popular types of technical analysis. The term “technical analysis” refers to the study of stock market data to forecast future trends.
The two primary ways to utilize these technological tools are through fundamental and technical analysis. Fundamental analysis is when investors attempt to invest in companies by examining their financial statements (i.e., earnings, sales, etc.). On the other hand, technical traders trade shares according to past performance rather than underlying value or company goals.
Saxo bank can provide you with all the technical tools you need; follow this link to get started. Let’s look at the four most popular technical analysis charts used in stock trading.
Bar charts
Bar-Charts are used to show the high, low and closing prices over a specific period. Depending on how they are created, you can use them in different ways, either via the traditional method or the more simplified point and figure method.
Candlestick charts
Candlestick Charts are Japanese Candles or OHLC charts (Open, High, Low & Close). These charts use colours to portray whether the price closed higher or lower than it opened. If you see green candles, the price closed higher than it opened and vice versa for red candles. The four parts of a candle (the open/close/high/low) can help traders predict whether momentum has shifted because these points indicate where buyers and sellers entered and exited the market.
Line charts
Line charts are most commonly used to show trends over some time, such as daily or weekly data. You can use these charts to create support and resistance lines that indicate when the price is likely to change direction.
Area charts
Area Charts (also known as Integrated Charts) use both lines and bar charts together to give a more accurate picture of how price moves between these two points.
Other types of technical tools
Dow theory
Dow Theory is an indicator [MACD] used to predict the market trend at a particular time. It was initially developed by Charles Dow in 1900 and used three different averages (the 10-period, 20-per, and 52-week) to help with this prediction. For it to work, traders must first look at all three averages then make their own decision on the market direction based on these averages instead of relying entirely on what the consensus has said about them.
RSI
Relative Strength Index (RSI) is a momentum oscillator where price movement over the last 14 days is used to determine whether there is any chance of upward or downward movement in price within the next eight days. Traders must look at the raw number and then compare this with where it closed the previous day to get a more accurate reading (i.e. if today’s close were lower than yesterday’s, we would see a lower value on RSI).
MACD
Moving Average Convergence/Divergence (MACD) is another oscillator that helps determine when the price might break out of the current trend. The MACD subtracts one moving average from another to indicate whether momentum has shifted between shorter and longer-term averages. Traders should pay attention to when these lines cross. Hence, they know when momentum might shift in either direction but should also avoid relying too heavily on this information as it doesn’t consider other technical indicators or company fundamentals.
Bollinger bands
Bollinger Bands show different levels of volatility in the market and help traders know when there is a high probability of either upward or downward price movements based on past data. Traders can use these bands to set buy-sell orders. Still, they must be careful not to rely too closely on them as the price could break out of these bands without any significant changes in company fundamentals or technical indicators such as RSI etc.