Home/Blog/Investing Insights/Be a Chart Jockey or Just Look Like One: Intro to Technical Analysis

Be a Chart Jockey or Just Look Like One: Intro to Technical Analysis

27 August 2015 in Investing Insights

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.

Bollinger Bands

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.[2]

bollinger

Source: BollingerBands

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.[1]

Use technical analysis at Motif Investing.

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.

Ready to get started with Motif Investing? Sign up for a free account today.

The views and opinions provided by third party sources are provided for informational purposes only but do not reflect the views of, or imply an endorsement or recommended investment or investment strategy by Motif Investing.

This article is provided for informational purposes only and is not a solicitation or a recommendation that any particular investor should purchase or sell any particular security or pursue any specific investment strategy. Motif does not assess the suitability or the potential value of any particular investment. You are responsible for understanding the risks involved with investing in securities and for all investment decisions you make.

Investing in securities involves risk, including the possible loss of principal; individual investments or a collection of individual stocks such as Motifs which are concentrated in an idea or theme may face increased risk of price fluctuation over more diversified holdings due to adverse developments within a particular industry or sector. Past performance is no guarantee of future results.

[1] Wilder, J. Welles, New Concepts in Technical Trading Systems, Trend Research, 1978.

 

 

  1. Kendra
    30 Aug at 1:04 pm

    I remember studying head and shoulders but haven’t used it too much. I like RSI and the support and resistance methods.

    Reply
  2. Pingback: The Market's Down So Use These Technical Analyses For A Performance Advantage - munKNEE dot.com

*