Technical analysis of the stock market. Fundamentals of technical analysis

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:48

Technical analysis of the stock market allows you to assess the balance of power between "bulls" and "bears" at the current time. Technical analysis appeared as a result of traders observing the price chart and identifying rules of behavior formed through the analysis of market psychology, the repetition of history and other factors.

Technical analysis is carried out using various indicators. Most forecasts are made by professional traders after technical analysis.

The Russian securities market is still underdeveloped compared to the markets of other countries. The development of the stock market contributes to the expansion of financial instruments. In addition, there are different types of stock markets. The primary stock market involves the issuance and placement of new securities for the first time. The secondary stock market may be organized or unorganized. Stock markets are also classified by territory.

Depending on the traded financial instruments, a trader chooses a broker foraccess to trading. The rating of Forex brokers allows you to evaluate the number of financial instruments accessed by a particular broker. Brokers have different commissions and working conditions. It is necessary to think carefully when choosing a broker for trading. The Forex broker rating includes a comparison of brokers in all important aspects of work.

Differences between fundamental and technical analysis

Fundamental analysis involves the study of fundamental factors that affect the price during news releases and in the long term. Fundamental indicators include: the level of GDP, unemployment, changes in the refinancing rate, etc.

Technical analysis involves the analysis of the price chart using indicators, geometric shapes, price support and resistance lines. Technical analysis more fully takes into account the psychological aspects of the players in the short and medium term. Almost all traders use this type of analysis, while few players use fundamental analysis, which is due to the need to study a large amount of data in order to form objective conclusions.

Even after forming conclusions based on the fundamental analysis, a trader is looking for the most convenient entry point to the market using technical analysis tools. Many traders use special programs to conduct technical analysis. A stock market analysis program, as a rule, analyzes the chart and identifies signals from various indicators. HoweverLess than most traders are engaged in the analysis of charts on their own, without the use of additional software. Technical analysis of the stock market involves the use of signals from different indicators, while the program gives signals for one or two indicators and does not take into account many other factors, such as the release of important news, etc.

The postulates of technical analysis

The main functions of the market are as follows:

in the concentration of free cash by selling securities;
in attracting investments by organizing the purchase of company securities;
in ensuring their high level of liquidity.

The stock market is not as abstract as it might seem. Behind the securities placed for sale are the real economies of operating organizations that provide jobs, produce goods, works or services, and pay taxes.

There are three main postulates in the stock market that professional traders use to build their trading strategies:

The price takes everything into account.
Price moves directionally.
History repeats itself.

The price takes everything into account. Like currency, Forex, the stock market takes into account not only the state of the country's economy, but also the expectations of traders. Expectations are based on rumors, news and fundamental market analysis, as well as on insider information. Analyzing the chart, the trader applies his knowledge, information, indicators and other means of analysis to determinethe most likely further direction of price movement.

A huge number of different factors can affect the price, such as: statements by politicians, a natural disaster, the expectation of important news, etc. All, absolutely all publicly available information is already contained in the price.

The price is moving in a direction. The stock market, like the Forex market, is subject to trends. That is, the price never moves randomly. This is confirmed by the main indicator of technical analysis - the trend.

History repeats itself. The psychology of most players implies the presence of certain action scenarios that are activated in different situations. It is the repetition of history that contributes to the allocation of general rules for conducting technical analysis of the market.

Technical analysis indicators

Technical analysis of the stock market is performed by building and using the following indicators:

trend line, support and resistance levels;
geometric shapes;
technical indicators of the oscillator group;
trend technical indicators.

Trendline

If the price moves up or down - such a movement can be called a trend. If the price moves sideways, it is a sideways trend. The trend has several cycles: origin, development and completion. The trader is looking for signs of an emerging trend to enter the market in its direction. You need to exit the market at the first sign of the end of the trend.

The emergence of a trend in the long termperspective, as a rule, due to fundamental factors. So, a trend can be formed under the influence of important news. One of the postulates of stock trading says: do not play against the trend or play in the direction of the trend. If a trader tries to play against the market, he ends up in a loss.

Trend development can take a long time. Trends can last for months or even years. The end of the trend is also due to fundamental factors. A sign of its completion may be a large price fluctuation in the opposite direction to the trend. Such a fluctuation indicates that a large player has closed the position.

If you look at the chart below, you can see a downtrend. A trend line in a downtrend is drawn along price highs. In a downtrend, its line is drawn along price lows.

To determine the trend, traders also use additional indicators, such as moving averages, ADX and others.

Support and resistance levels

A resistance level is a line that the price touched several times and bounced back. For example, the trend line (in the example above) serves as a resistance line. The image shows that the price touches the trend line, but does not break it. Near the trend line, it is necessary to enter the market in the direction of the trend, provided there are no signs of its completion.

After the price breaks through the resistance line, this line becomes the price support level. This isshown in the price chart below.

Geometric shapes

There are the following figures used for technical analysis of the chart: triangle, rectangle, "flag" ("pennant"), "head and shoulders", "triple top", "double and triple bottom", "saucer" and others.

All figures are divided into two groups: reversal and continuation figures. Reversal patterns show the trader the possibility of a reversal of the current trend, and continuation patterns indicate its most likely further continuation. Most often, the method of geometric shapes is used not by itself, but in conjunction with other means of analysis.

Technical analysis of the stock market, like the Forex market, involves the use of geometric shapes, which is due to the repetitive behavior of most traders in case they appear on the chart. In both the stock market and the foreign exchange market, this technique of analysis is widespread.

Triangle. There are four types of triangles used to predict price behavior: descending, ascending, symmetrical and expanding triangles. This figure belongs to the reversal group. Before entering the market, when this figure is formed on the chart, you must wait for the breakdown of its borders.

Rectangle. This figure is formed when clear horizontal support and resistance lines appear on the chart. The rectangle indicates the balance of power in the market.

"Flag" or "pennant". These are trend continuation patterns. The appearance of a flag or pennant on the price chart is accompanied by a correctiontrend movement.

"Head and Shoulders". This figure is of great importance in the formation on the daily chart. In smaller timeframes, a small number of traders work, which means that the reaction to the formation of a figure is lower. The figure belongs to the reversal group. Also in technical analysis, the “inverted head and shoulders” pattern is often used, which in this case is called the “double bottom”.

"Triple top". This pattern belongs to the reversal group and forms three peaks in one price level.

"Double and triple bottom". This pattern is the opposite of the triple top pattern. Price makes three lows in one range.

"Saucer". Reversal trend pattern. It has the greatest value on long timeframes - daily, weekly charts. The formation of this pattern can take more than a month.

Trend technical indicators

Determining the direction of the trend plays a crucial role in trading. Playing against the market rarely ends in profit. Technical analysis of the stock market is very similar to currency analysis.

Moving Average. Moving averages or MAs are the most important trend indicator. This indicator visually represents a line, which is built on average prices for the specified period. When plotting this indicator, the closing prices are the most important.

There is a saying in the investment market: "The market is opened by amateurs and closed by professionals." It fully reflects the importance of closing prices. Professional traders open trades for large amounts and have a strong influence on the price. It is for these reasons that closing prices are given the most importance.

The most popular types of MA are simple, exponential and weighted moving averages. The Simple Moving Average (SMA) is built on the basis of the arithmetic average over the selected time period. The weighted moving average (WMA) is built taking into account the “weight” coefficient, i.e. the latest prices are taken into account most fully. The exponential moving average (EMA) is similar to the WMA, but takes into account all the prices of the previous period.

Usually traders use two MAs of different periods. In this case, the signal to buy is the intersection of the fast MA by the slow MA from the bottom up. A signal to sell is the crossing of the fast MA by the slow MA from top to bottom.

Indicators of the oscillators group

Oscillators measure market volume. This group of indicators reveals overbought and oversold zones where a reversal is most likely. The indicators of this group give the clearest signals when the price moves within the channel.

The most popular oscillators among traders are the following: MACD, Stochastics Oscillator, RSI and others. These indicators are used in the technical analysis of not only the stock market, but also the currency market.

MACD indicator. This indicator is built on the basis of moving averages of different periods and is designed to determine the price reversal. It stands for: "MovingAverageConvergence / Divergence", which translates as "Convergence /Moving Average Divergence.”

The formula for calculating this indicator is as follows: MACD=Fast EMA – Slow EMA.

The properties of this oscillator have "fast" and "slow" fields, which correspond to the period of fast and slow EMA.

When the price is above the zero mark of this indicator and rises, it indicates an upward price movement, and vice versa, if the price is below the zero mark and falls, it indicates a downward movement.

The signal of this indicator is the price crossing the zero level. So, crossing the zero mark from the bottom up is a signal to buy, and from top to bottom - a signal to sell.

If the indicator shows a false price movement (divergence), then this is a signal for a price reversal.

Stochastics Oscillator indicator. Stochastics (Stochastic) takes into account not only closing prices, but also local highs and lows. This indicator is more informative than other indicators of the oscillator group. This indicator provides for an overbought zone above the 80 level and an oversold zone below the 20 level.

The signal to enter the market is the intersection of two lines, similar to the signals of the MACD indicator. Divergence on this oscillator also serves as a strong signal to enter the market.

RSI indicator. The main parameter of this indicator is the period for which it is built. The author's recommended value is 14, but periods 9 and 12 are also often used. This indicatorused to measure the strength of a trend. It compares the rate of rise and fall of the price over the selected time period.

If the indicator line is directed upwards, this indicates the prevalence of a growing trend in the market, and vice versa. Conventionally, the balance of power, that is, the equilibrium in the market, is reached at around 50. Crossing the indicator line of level 50 from top to bottom serves as a signal to open a short position for sale. Crossing the level of 50 from the bottom up is a signal to buy.

In closing

Technical analysis of the stock market implies the presence of such indicators that are used only in this market, these include: NH-L, TRIN, MAS and others. Often used for Forex analysis are the indicators that were listed in this article. Technical analysis of the stock market involves the simultaneous use of several indicators that can complement each other. But there are other factors to consider when predicting the price.

The Forex market is specific. Trading on the foreign exchange market is a speculation in the exchange rate. Forex currency is traded in pairs, such as EUR/USD, GBP/USD. At the same time, Forex indicators are also used in the stock market. The stock market is an abstract concept, but it is closely related to the currency exchange. With a large purchase of shares, currency is used, which is immediately reflected in its price. At the same time, a sharp depreciation of the currency could have a strong impact on the stocks of many companies.