Investors who study stock charts and the data they contain to predict future moves in the stock market are called technical analysts. Usually technical analysis is not used for long term investing and is not concerned with the value or even the kind of company whose stock is being traded. Rather, it is used for short-term stock trading and once the projected gains are reached the stock is sold.
Technical analysis is based on the patterns that can be seen in stock prices when they are studied over time. The assumption is that all important factors such as company performance, world events and general economic shifts, have already been factored in by the workings of the stock market and are reflected in a stocks current price. Market efficiency, therefore, produces price changes that can be tracked and used to make investment decisions.
All of the attention in technical analysis is centered on precisely tracking ups and downs of stock price movements in great detail. Because long term investment is typically not considered it is not necessary to analyze a company's future potential or try to predict its course over any long period of time.
It is not even necessary to find a stock moving up in order to make a profit. Indeed, either up or down movements can be profitable if recognized properly. As a safeguard stop-loss orders can limit exposure if the market does not move in the direction predicted.
As might be expected, hundreds of repeated patterns of stock movements have been noted and formalized over time. These are at the heart of the art and science of technical analysis and some are based on the basics of price "resistance' and price 'support.' Resistance refers to the highest level a stock price can be expected to meet before it falls again. On the flip side, support is the price at which the stock can be expected to rise in value again. Prices usually will bounce either up or down once they meet the perceived barrier of support or resistance.
Charts tracking the rise and fall of stock price movements are the most fundamental tools of technical analysis. Day in and day out technical analysts most often use bar charts. In a bar chart vertical bars are entered representing each time interval desired: weeks, days or even hours or minutes. The highest price of the stock during that period is represented by the top of the bar and the lowest price by the bottom of the bar. The small bars on the right and left represent opening and closing price respectively. Obviously, a wealth of information can be gained from a trained glance at a bar chart. The side bars let you know instantly what the spread was between opening and closing price, with a long bar signaling a considerable variation in stock price during the period represented.
Candlestick charts are another type of chart, closely related to the bar chart. The candlestick shapes, solid bodies used to show differences between opening and closing prices, are colored differently to indicate a higher or lower close. The lines or shadows by the shapes show the high and low prices reached during those periods. A red or black colored shape is used for a period when the stock price fell and a green or white shape when the price rose. Short shadows accompanying a green body is a bullish sign because it shows a stock which opened low and closed high. A red body with short shadow is, on the other hand, bearish, showing a stock which closed low after a high opening. All in all more than 20 different patterns are seen on candlestick charts, each denoting a different situation to the experienced eye.
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