Stock Trading 101: Lesson 2

What is technical analysis? Essentially, it is chart reading. It is the science or art of recognizing chart patterns and interpreting them to make buying and selling timing decisions and implementing a trading plan. Technical Analysis can help not only make your decisions but also make them more precise and disciplined. Many Technical Analysts believe that everything that you need to know about a stock can be found by looking at the charts.
Technical Analysis comes in two forms: Price patterns and Indicators

Price Patterns-Simply said these are visible patterns of what is happening to the price of the security.

Indicators-These are mathematical algorithms that take all aspects of the price movement, including volume, and are put together to form all kinds of ratios and analysis by which future price movement may be guesstimated.


There are 3 ways to view price patterns. Price patterns are simply the patterns of a security’s price movements for a know timescale and the 3 main ways of viewing these price actions for any period of time are:
Simple Line Chart

line chart

With Simple line charts, the line can be charted in three ways, at the average between the high and low, at the opening price, and at the closing price for each period of time.

A more useful chart would be to see the daily prices represented in such a way where we can see the high, low, open, and close for each day.

Bar Chart

bar chart

Notice how each day is represented by a vertical bar. Also notice how each bar has a small horizontal line to the left and one to the right.

bar explained

bar2.png (5.86 KiB) Viewed 60 times

These lines tells us the opening and closing prices of the security for each day. The tops and bottoms of each vertical line represent the high and low prices on that particular day.

A much clearer way of describing price action for each period is by using the japanese candlestick.
Japanese Candlestick Chart

candlestick chart with volume

Here is how the candle stick work
The candle stick will have the body of the candle and may or may not have shadows(vertical lines above and below the candle's body)
The candle body represents the opening and the closing price of that period.
the candle shadow represents the high(top vertical line) and low(bottom vertical line) price of that period

candlestick explained

Up candlestick(Green)
-Green Body.
-Closing price will be higher than the opening price.

Down candlestick(Red)
-Red body.
-Closing price will be lower than the opening price.

After knowing your charts, we will continue with the next lesson wherein we will be discussing basic chart patterns.

Originally posted by Ronald Manipol of http://estockmarketforum.com trading forum on steroids