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Type of Securities Investment Strategies Fundamental Analysis Technical Analysis

Technical  Analysis Categories

 - Types of Charts
     
* Bar Charts
        * Line Charts
        * Candlestick Charts

 - Chart Reading
       * Trendlines
        * Resistance Levels
        * Support Levels

 - Moving Average
     * Simple Moving Average
      * Weighted Moving Average
      * Exponential Moving Average
      * Triangular Moving Average

 - Momentum Indicators &
    Oscillators
 - Rate of Change
 - Relative Strength Index
 - Moving Averages
    Convergence /  Divergences
 - Price Oscillator
 - Stochastic
 - Money Flow Index
 - Williams %R
 - Volume + Moving Average

 - Stock Chart Overlays:
 - Bollinger Bands
 - Parabolic SAR

 - Stock Chart Patterns:
    * Head and Shoulders
      * V Formations
      * Double Tops and Bottoms
      * Triple Tops and Bottoms
      * Saucers - Rounded Tops and
          Bottoms
      * Ascending, Descending and
          Symmetrical Triangles
      * Channels - Rectangles
      * Rising and Falling Wedges
      * Bullish and Bearish Flags
      * Pennants
      * Diamonds
      * Cup and Handle
      * Pan and Handle
      * Spikes
      * One-Day Reversals
      * Island Reversal

 - Dow Theory

 - Elliot Wave Theory

 - Spinella Heart Rate Theory

 - Fibonacci

 

 

 


Types of Charts

Using and understanding charts are important skills for maximizing the benefit of trading decisions. In many cases, one or two dollars on both the buy and sell sides of a transaction can make the difference between a good investment and a marginal one. Most stock investors use the basic horizontal/vertical charts. The bottom axis represents the dates/time and the vertical axis reflects the stock prices. Usually below the horizontal/bottom date axis is a separate comparative chart of volume statistics.

The three customary charts that are used by investors are as follows:

  • Bar Chart Ė This chart is useful when making short-term decisions. The vertical line shows the highs and lows for the stock; the left horizontal tic mark represents the opening stock price and the right horizontal tic mark the closing price. It contains the same information as a candlestick chart, except itís harder to read.
  • Line Chart Ė The line chart connects the closing stock prices from period to period, and is a good depiction of the general trend of a particular stock. Line charts are very useful in visualizing long-term trends, but they do not address daily price swings.
  • Candlestick Chart Ė The nice feature of a candlestick chart is that it is easy to read and informative. The candlestick format clearly identifies if a stock closes higher or lower for any specific trading session. The other unique features of candlestick charts are listed below:
  1. They clearly show the price momentum of a stock.
  2. The trading period is shown in a vertical rectangular-shaped box and by the wicks that extrude from each end of the candlestick. The length of the rectangular box reflects the opening and closing stock price for the period. The tic marks that look similar to the wick of a candle, extruding from the top and bottom of the rectangular box, represent the stockís high and low prices for the trading session.
  3. The rectangular box of the candlestick is called the real body. It represents the distance (price difference) between the opening and closing price for the trading session.
  4. The wicks of the candlestick are called shadows. The wick extruding from the top end of the rectangular box (real body) is called an upper shadow, while the wick extruding from the bottom of the candlestick is called the lower shadow. The shadows reflect the fluctuations between the high and low stock prices for the trading period.
  5. If there are no wicks extruding from the rectangular box (real body), it is called either a shaven head or shaven bottom. The color of the candlestick represents whether a stock opened or closed at its high or low for the period.
  6. The unique feature that has made the candlestick chart popular, is that if the rectangular box is white or open, it indicates that the stockís closing price was higher than its opening price for that period. If the rectangular box is black, then the closing price was lower than its opening price.
  7. The prior trading sessionís closing price does not necessarily correspond to the next periodís opening price. Each trading session is a separate event.

The diagram below is a typical candlestick chart, using Altria/Philip Morris as an example. Altria Group, Inc. is a good stock with which to become acquainted. It has had sharp price swings because of litigation issues, but has always been able to bounce back. Buying on dips historically has been a good strategy when investing in this company.

Reproduced with permission of Yahoo! Inc. 2004 by Yahoo! Inc.
YAHOO! and the YAHOO! logo are trademarks of Yahoo! Inc.

To help them predict future price movements, candlestick investors have developed specific terms for recurring chart patterns, such as: doji, hanging man, hammer, umbrella lines, spinning tops, dark cloud covers, and three black crows.

The candlestick chart is a very powerful tool because itís visually easier to read than the bar chart and is jammed packed with analytical content. One can see from the above Philip Morris chart, how the "ease of reading" feature of a candlestick can level the playing field for investors who are not naturally detail- orientated. The actual picture of a candlestick makes it easier for investors to observe the trends and patterns of a securityís stock price. This straightforward presentation can help investors clarify their trading decisions and (hopefully) help maximize their returns by identifying, early on, the direction of a trend.

Historically, the Japanese rice traders used candlestick charts in the mid-1700ís, but it can be applied to almost any type of trading. The current popularity of candlestick charts does not necessarily make them better than the old fashioned bar charts.

Bookstores carry many titles on charting and technical investing. Learning the language of technical analysis and chart reading can be difficult and may initially seem overwhelming. Charts need to be kept in perspective; they are one tool out of an arsenal of hundreds that people have at their disposal when investing.

 

     
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