When the markets are rallying, people may feel really confident about their trading ability, but once things start to move the other way…
Never fear, help is here—we’re about to tell you what certain professionals focused on qualitative analysis and charting may use to help make investing decisions. It’s technical, though.
Technical analysis is the fine art of studying market price movements and indicators to help facilitate trading decisions.
Research by David Smith, Christophe Faugere and Ying Wang at the University of Albany and Kedge Business School Bordeaux found that investors using technical analysis had some performance advantage over those who didn’t use these methods. The research also found that the performance advantage was more evident during down markets.
If that has piqued your interest, read on to learn more about a few of the more popular types of technical analysis.
On-Balance Volume (OBV)
OBV measures the flow of a stock’s trading volume in relation to its price over time. Traders look at this metric when trying to predict major movements in a stock’s price.
If a stock has a sudden rise or fall in volume without a notable change in price, OBV suggests that an upward or downward jump may be bound to occur.
This volatility indicator measures how high or low a stock’s price is compared to historical trades. Bollinger bands are drawn as a set of three curves: a lower band, middle band, and upper band. The middle band measures the intermediate-term trend using a moving average.
The distance between the upper and lower bands illustrates volatility–closeness, indicates low volatility, and greater distance means increased volatility.
Relative Strength Index (RSI)
RSI charts the current and historical strength or weakness of a stock or market based on closing prices during a given trading period.
This indicator uses a scale of 0 to 100 to indicate whether the market perceives that a stock looks overbought or oversold, based on the direction, speed, and magnitude of price movements, usually over a 14-day period. The closer the RSI value is to zero, the more oversold a stock is, and the higher the RSI value, the more it suggests a stock is overbought.
Source: MetaStock, Investopedia
Support and Resistance
Support and resistance can be useful in analyzing supply and demand and seeing where investors are willing to buy (support) and sell (resistance)
Support represents a level that a stock price rarely drops below during a particular time period. The opposite is resistance, which indicates the price level the stock price seldom goes above.
If a stock price breaks through support and resistance trend lines, it suggests that market psychology has shifted and new support and resistance levels are likely to emerge.
Head And Shoulders
Visualize for a moment a person shrugging their shoulders—that is how one of the most popular graphical formations in technical analysis came to be named.
A head-and-shoulders pattern arising in the chart of a stock’s price consists of four components, resembling a left shoulder, head, right shoulder, and neckline, respectively.
This pattern can appear right side up, like a person, which is called head and shoulders top. It can also arise in the inverse, known as head-and-shoulders bottom.
Many investors believe head-and-shoulders formations emerge when a market trend is reversing, which can ultimately take weeks or months to complete. Top formations can signal coming bearish trends while bottom formations can indicate bullish trends.
Keep in mind, top and bottom formations rarely appear perfectly symmetrical. One shoulder could be wider or taller than the other and the neckline may be angled.
Whether you start with head-and-shoulders or another of the technical analyses mentioned in this article, their utility increases as you gain practice. The more you use these methods, the better you may become at making investment decisions.
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 Wilder, J. Welles, New Concepts in Technical Trading Systems, Trend Research, 1978.