Movement & Chart Style

Dear Traders,

Moving to our Technical Analysis portion as I promised in my First Blog about Stock Trading Basic. 

What is Technical Analysis and why it is required?

Imagine, you want to buy a laptop and you don't know anything about laptop's specification or configuration however you really need a good one. So, to choose a good laptop there are two choices.

Option 1: You visit a vendor in market and see the wide variety of the laptop in his shop. Maybe he is selling best laptop however you don't have any technical knowledge about it. Then you try few other shops in the market to match the specification and price. Finally buy a laptop that satisfies your need.

The advantage with this technique is that you know exactly what you are buying since you have researched about it on your own. However, on the flip side, the methodology you adopted is not scalable as there could be about 100 odd vendors, and with limited time at your disposal, you can probably cover about 4 or 5 vendors.  Hence there is a high probability that you could have missed the best laptop available in the market!

Option 2: You can go to online store and analyse the buyer’s comments about the laptops. What they have to say about their experience about a laptop. If they are rating high to a laptop, chances are that you can buy the Best Laptop at cheapest rates.

The advantage of this method is the scalability. You just need to spot a laptop with the maximum number of customers and bet on the fact that the laptop is good based on the crowd’s preference. However, on the flip side the crowd need not always be right.

If you could recognise, option 1 is very similar to Fundamental Analysis where you research about a few companies thoroughly and buy stocks for a long term.

Option 2 is very similar to Technical Analysis where one can analyse & scan for opportunities based on the current & historic trend also known as the preference of the market. What traders thinking about the stock with general stock patterns that they follow for trading.

Technical Analysis is a technique to identify these trading opportunities based on the trend and the chart patterns. Each chart pattern tells many things about the market view and trader's opinion. So, before buying or selling any stock, you must understand these analysis points and create a point of view.

What all I need to understand for a Technical Analysis? 

To do Technical Analysis, there are few things that you need to understand.

1. Movement

2. Chart Style

3. Studies

4. Indicators

1. Movement

There are two type of movement in the market. You must have heard about these terms "Bearish" & "Bullish".

I) Bearish: This term came into picture from Bears as they "Don't Walk, They Slither". So similarly, when market losses it's momentum and getting down day by day, we call it Bearish Momentum.

II) Bullish: Another term came into picture from Bulls. They fight with their Horns and pull anything in front of them. Similarly, when a market is pulled upwards is called a Bullish Momentum.

Any movement in the D-Street, depends on the Global views, News about the stock, Chart Patterns etc and can stay from a week to years. Trading is always a fight between Bears & Bulls. We (Traders) are only Bears sometimes and Bulls another time. Trading happens when we think the price of a stock will go up and at the same time someone else think that the price of the same stock will go down or vice-versa. So when someone sells the stock someone else has to buy it. Else trading will not happen. We understand this process and phenomena deeply as we move on.

2. Chart Style

There are various Chart type or Chart Style available that we use on a regular basis. For example: Line Chart, Pie Chart, Area Chart etc however these are of no use in Stock Market Technical Analysis except Line chart.

The regular chart work on one data point at a time where as we require 4 data points at a time to be displayed.

Below are some of chart types:

1. Line

2. Bar chart

3. Candlestick 

4. Hollow Candlestick Chart

1. Line Chart

So, as you can see below the illustration of Line Graph which use one data point at a time. And with reference to Stock Market, it only uses closing price of the stock. For a month, it will use closing price point for 30 day and connect the dots with the line.

Using Line Chart, we can see the trend of the stock however we can't create a point of view for future movement.

2. Bar Chart

So below is the one simple Bar Graph sample for a selected period of time.

To understand Bar Chart, below is one Bar Chart which is using 4 data points.

Opening Price: When the market open for trading, the first price where stock starts its journey.

High Price: This represents the Highest price of stock at which traders wants to transact.

Low Price: This represents the Lowest price of the stock at which market participant wants to trade.

Closing Price: The last price for the day. This is the most important price which tells about the momentum of the trading session for the stock for the day. Based on the closing, we can decide whether the day was positive for the stock or negative.

So, we can understand now that where the stock opened, closed with High & Low prices at the same time. But visually this is difficult to understand whether it is negative or positive for the selected period.

3. Candlestick Chart

The most common and widely used style is Candlestick Chart which carries 4 price information of the period along with visuals of Negative or Positive momentum. So, you will be able to see the price trend with all 4-price information at the same time.

Special fact: Candlestick originated from Japanese rice merchant named Homma Munehisa who use these candlestick chart to track market prices and daily momentum hundreds of years before becoming popular in USA. 

Below are the images to understand Candlestick in a better way.

Body of the Candle:

1. Red

2. Green

Red itself indicated a danger. Hence a Red Candlestick means a negative trading session for the stock as sellers are in full control. Where opening price was high, and the closing price is low for the stock.

Green represents the peace. A Green Candle brings peace in our mind because we now know a Green Candlestick means a positive sign of strength for the stock as buyers are in full swing. Where opening price was low than the closing price for the stock for the day. You can also buy with the positivity in the market.

4. Hollow Candlestick Chart

Hollow candle is like Candlestick chart only. The only difference between these two is, the Green Candle in Candlestick Chart type is Blank Candle in Hollow Candlestick Chart type. 

Below is the sample graph with Hollow Candlestick Chart Type.

So, this is all for this Blog. I will continue with Studies and Indicator in my Next Blog. Till then, Happy Trading!!