Technical analysis is not just a trading method, but more importantly, it is a trading philosophy that focuses on the long term rather than the short.
It does not matter what kind or size of trades you are looking to make; all investors will benefit from learning about technical analysis.
Studying how markets behave based on past patterns teaches us to understand why they move as they do and thus can give an idea of where prices might go in the future. It’s the basis for technical analysis.
Learning to read charts isn’t nearly as hard as most traders believe it is, but if you are willing to learn, you will be rewarded with superior results over those who only look at their stocks each morning and then make a decision on what to do with them.
You will need to be familiar with three primary types of charts when doing technical analysis: line, bar, and candlestick.
Line charts
Each type of chart can provide unique insights into what is happening in the market.
Line charts connect the closing prices of securities over a specified period. They are used to identify general trends in the market and usually show the primary trend (up, down or sideways) more clearly than other charts.
Bar charts
As the name suggests, bar charts use bars to represent price movements over a designated period. The length of each bar aligns with the size of the price movement, and the colour indicates whether the price is moved higher or lower. On a bar chart, the price is always plotted on the left-hand side of the bar and volume is planned on the right-hand side.
This type of chart can be overlaid with simple moving averages so that traders can see what trend is dominating at any given moment in time without having to look at several different charts.
Candlestick charts
Candlestick charts show more detail than line or bar charts because they are based on the high, low, opening and closing prices for securities over any given period. The candlestick colours indicate whether each day ended on a higher or lower note than it opened with
They offer compelling insights into market sentiment by plotting these highs and lows about where the stock closed.
A brief guide on how to read line, bar and candlestick charts:
Line Chart:
A line chart is used to identify general trends in the market. They are simple to read and usually show the primary trend (up, down or sideways) more clearly than other types of charts.
Bar Chart:
A bar chart comprises bars that indicate the price movement over a designated period. The length of each bar replicates the size of the price movement, and the colour indicates whether the price moved higher or lower. On a bar chart, the price is always plotted on the left-hand side of the bar and volume is planned on the right-hand side.
Candlestick Chart:
The candlestick colour indicates whether each day ended higher or lower than it opened with. This type of chart offers compelling insights into market sentiment by plotting these highs and lows about where the stock closed. Once you understand how to read line, bar and candlestick charts, you need to read them. Candlestick charts offer more detail than other charts because they are based on the high, low, opening and closing prices for securities over any given period.
Technical analysis can provide valuable insight into the dynamics behind changing security prices–insights that no other method can replicate. And, as with any other skill, the more you practice, the better you will become at it. So start studying different charts and anticipate where prices might be heading. With a little bit of effort, you’ll be able to improve your options trading skills significantly.
In conclusion
Thank you for reading! Hopefully, this article has helped clarify technical analysis and has given you a better understanding of how to use it in your trading. As always, if you have any questions or feedback, please feel free to view this page for more info.
