• Important: In which direction is the trend pointing?
• Investors should keep an eye on the trading volume as well as the movement of the share
The American Charles Dow first drew attention to himself with chart analysis at the end of the 19th century. He was the first editor of the Wall Street Journal and also the one who later founded the Dow Jones, one of the most important stock indexes in the world.
Even today, many investors use chart analysis to predict price movements and to identify trends and buy or sell signals at an early stage. Chart analysis focuses on psychology and is based on the assumption that certain situations in the market always lead to the same reactions due to human behavior. Therefore, the chart analysis examines the past price development of a share for conspicuous price formations that occur again in one way or another and can therefore be predicted.
Where is the trend pointing?
Important in order to be able to decide whether to buy, sell or hold a stock is: Where is the trend pointing – up, down or sideways? Because in chart analysis, it is assumed that prices do not develop randomly, but continue in the direction they have taken for a certain period of time until they meet some kind of counterforce.
In order to recognize such an upward, downward or sideways trend, only a few high and low points are required in simplified form, which can each be connected to form a line that then points upwards or downwards. There are also numerous chart formations, i.e. certain chart images that indicate a trend, such as flags, pennants, rectangles, triangles, wedges or shoulder-head-shoulders formation. Such formations can help investors spot a trend or reversal and make a buy or sell decision.
Keep an eye on trading volume
However, it is not only decisive where the share is moving – whether it is rising or falling – but also the corresponding trading volume. If there is a price increase with high trading volume, this indicates that, for example, fund managers and other large investors are buying more shares. Such buying by institutional investors is exactly what investors want to see because they have enough power to give the stock a sustained boost. Conversely, if a stock’s price is collapsing on high volume, alarm bells should be ringing as it is a sign that large investors are increasingly exiting.
On the other hand, a price increase with unusually low or usual trading volume can indicate that large investors are currently not buying aggressively and the stock may only rise in the short term, while a price collapse with low trading volume is an indication that at least the large investors are not selling on a large scale and investors in which case it would probably be better to keep your feet still in order to make further profits with the stock.
support and resistance
Supports and resistances are also interesting for investors. If a stock stays above a relevant level in the past, it will find a support line or a support zone there. If the price falls below this support, there is a chart breakthrough, which can be interpreted as a sell signal. If the price of a share bounces off a certain mark several times and does not manage to overcome it, it will meet resistance here. If resistance is broken after bouncing several times on the way up, a chart breakout will occur which can be interpreted as a possible buy signal. From the former resistance, a technical chart support can now form. A role reversal can also occur in the other direction, so that resistance can arise from one or more former intermediate lows of a downward trend. Depending on whether it is a specific price level or a somewhat broader range, we speak of a support line or a support zone or a resistance line or a resistance zone.
However, there are also false signals in which the price returns below or above this level after breaking through the resistance or support.
In addition to former highs and lows, psychologically important levels are also round chart marks, since investors need some kind of orientation for their trading decisions and like to use round marks for this. Such round markers are also considered to be psychologically important for stock indices, for example.
Market technical indicators
In addition to the chart technique, whose instruments deal directly with the price development, there are also numerous market-technical indicators in technical analysis, which are divided into three large groups – trend-following indicators, oscillators and moving averages. You also work with the data from the stock chart, but this is converted into indicators. Some of the most important of these indicators include the Moving Average, Moving Average Convergence/Divergence Indicator (MACD), Relative Strength Index (RSI), and Stochastic Oscillator, among others.
Editorial office finanzen.net
This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.
Image Sources: Jirsak/Shutterstock.com, PopTika/Shutterstock.com