Let’s Talk Technical Analysis

In blog posts from the past two weeks, we have provided beginner outlines for both qualitative analysis and fundamental analysis. We have explained that qualitative analysis is mostly subjective – regarding a company’s business practices and products – and fundamental analysis is mostly numeric – regarding a company’s profits and sales. Conducting these two types of analysis simultaneously may be very helpful for investors who are thinking about future investments. However, there is one more type of analysis that we have yet to address: technical analysis.

Technical analysis is less of a summary of business components, but more about the company’s stock price. Technical analysts simply study the stock’s past price movements in the market. While this can get pretty complicated with different fit lines and predictors, it’s best to remember that, at the most basic level, we’re just interested in the amount of stock shares bought and sold. Here is an introduction to technical analysis. While this list is not a complete list of all of the things you should consider in your research, we hope that it sets the groundwork for your basic understanding of technical analysis.

1. Charts

To begin our technical analysis, we need to start with the charts of a stock’s past price movements. You can find basic charts of the stock’s history on many investing websites or information websites such as Yahoo Finance or www.StockCharts.com. Oftentimes, the more in depth technical analysis tools can be found by making accounts through specialized technical analysis platforms, such as Bloomberg.

For now, we can start with the basic, free charts that we can find online. Usually, investors lean towards line charts, bar charts, or candlestick charts. Line charts are very simple: they trace the stock’s price shifts over time with one line. Then, bar charts can give investors a little bit more information by including bars that represent a selected period of time: an hour, day, a week, etc. Each bar has two tick marks – the left tick mark indicates the period’s opening price, and the right tick mark indicates the period’s closing price. Furthermore, bar charts are useful because each bar is colored in either green or red. While red indicates a price drop over the period of time that a bar represents, green indicates a price rise.

Lastly, candlestick charts are very similar to bar charts in their use of color and their indication of the period’s opening and closing prices. However, instead of simply using tick marks to indicate these opening and closing prices, the marks are constructed into a “body” (essentially a box that connects the opening price tick mark with the closing price tick mark). The fill color of these “candlestick bodies” varies by technical analysis website, but often indicates “up periods” or “down periods.” Candlesticks that are unfilled (with hollow bodies) generally indicate that the stock price rose, or “closed up.” Candlesticks that are filled (with solid color) typically mean that the stock price dropped and “closed down” during that period of time.

As always, it is good to become very familiar with the types of charts you are using so that you can more thoroughly understand your analysis and begin to look for trends.

2. Time Frame

When picking charts for your analysis, make sure you consider the time frame you’re looking at. Remember: you can check as many time frames as you want! Your bars and candlesticks could represent weeks, days, or even a few minutes. For analyzing stocks, it is good to look at both long-term history and short-term history in order to get a fuller picture of the stock’s movements.

3. Trends

After we find the right charts and time frames, we can start to look for trends in the data. This means that we want to find patterns in the stock price changes over time. The two most common trends are uptrends and downtrends. Uptrends signify that the stock price was generally rising over a period of time, while downtrends show an overall decrease in the stock price. These trends can be seen most easily with trend lines – essentially drawing in lines on your charts to explain the trend patterns. In conjunction with both qualitative and fundamental analysis, these trend lines can be very useful. Imagine you found an upward trend right at the same time a new product was released. You might partly attribute that upward trend to the success of a new product. Trends like these can give you more background information for what conditions may have led the stock price to increase, which might help you better predict price movements in the future.

As you get deeper into your technical analysis, you will learn about more trends and patterns that can help you to understand the past movements of the stock’s price. These are a very important part of technical analysis, so start by mastering trend lines and then continue to do your research!

4. Volume

On many charting websites, such as Yahoo Finance, you can get information about the volume of shares traded over a particular period of time. The higher the volume, the more actively traded the stock is at a given time. So, if the stock is trading down at a very high volume, it may indicate a sudden decline in demand for that stock. The volume can be related to your trends, too. Any trend with particularly high volume is regarded to be a “stronger” trend, meaning it may continue for longer or might have been motivated by widespread sentiment. However, if a stock’s price jumps in one day, but shows very low total volume, this may not indicate a very strong trend. Therefore, it is important to consider the volume of trade in your technical analysis, as it may help you gauge the strength of the trends you find.

5. “The Market Knows Best”

The advocates for technical analysis believe that market prices should be the most relevant indication of a stock’s success. However, many critics of technical analysis warn that looking at past events should not make it any easier to forecast the future, as the markets always change unpredictably. For many investors, it is best to exercise caution with technical analysis and know that past market data might not be a good sole indicator of future success for a stock. Instead, it is good to consider the market movements with reference to both your qualitative and fundamental analyses. By doing this, you might be able to put more reason behind the movements you see in your technical analysis, which may help you better interpret the effects of a company’s business practices in the future.

Overall, it is best to go about your analysis with a very thorough and skeptical mentality. By finding the kinds of charts that work best for you and applying trends you see to a company’s practices, you can get a more complete picture of how a stock’s price fluctuates in the way that it does.

Now your analysis trio is complete. We hope that the past few overviews have provided you with at least a basic framework for your investing research. Remember: these overviews are not totally complete and you should look to find as much information about a company and its stock as you possibly can. Happy researching, investors!

Overall, it is best to go about your analysis with a very thorough and skeptical mentality. By finding the kinds of charts that work best for you and applying trends you see to a company’s practices, you can get a more complete picture of how a stock’s price fluctuates in the way that it does.

Now your analysis trio is complete. We hope that the past few overviews have provided you with at least a basic framework for your investing research. Remember: these overviews are not totally complete and you should look to find as much information about a company and its stock as you possibly can. Happy researching, investors!