Stock chart analysis is used by many as one of the first steps in the technical analysis of a stock. The visual nature of stock charts gives you an instant feel for stock's trend. Let's take a look at how stock chart analysis can be used to analyze virtually any stock.
A stock chart contains so much useful data even though they can be as simple as a bar chart with the open, high, low, and close displayed over the particular time. One of the most wonderful things about stock charts is that the time frames can be quite easily adjusted from whichever stock trading or stock analysis software you happen to be using. Most all modern software and trading platforms will allow you to create charts on a one minute timeframe to a one-month timeframe at all points in between. With this type of flexibility it is easy to see why stock chart analysis is popular with both short-term as well as long-term traders.
Stock charts have become one of the most popular stock analysis tools because of the popularity of technical indicators. Indicators are formulated using a stock's price and sometimes it's volume over a given time. For instance, a simple 10 day moving average is created by using the average of the most recent 10 day's closing prices. Indicators help us to further visualize a stock's trend or a stock's lack of trend.
The visual nature stock charts also allows us to see if there are any cycles that we are interested in. After observing the chart we may find that our particular stock's price find its lows near the middle of the month and its highs near the beginning of the month. Please keep in mind that the cycle example just quoted was for the purposes of illustration only. I have to say that because there may be someone reading this who believes that that information was thoroughly researched and is therefore recommended for others to use. It is not. To repeat, it was merely a random example.
With the few examples we have seen that stock chart analysis can easily be the starting point from which you create your own stock trading strategies. A stock chart is always a great place to start. Once you have visualized any interesting recurring price patterns you may then choose to test those patterns to see how they would have performed on past data. This process is known as “back testing”. It is a way for us to see whether our trading ideas have any merit. Quite naturally, the true test comes when we begin to use a trading system that we've developed in real time.
It's easy to begin to use stock chart analysis to test out your ideas. It can really be as simple as opening up a free demo account with your favorite online stockbroker and placing trades in your virtual trading account. Once you start using your chart analysis to place trades you will be able to see which direction your equity will go. Obviously, account equity that increases may mean that you're onto a good thing. In this case it is a matter of continuing to test your strategy until you are comfortable trading with it in real time.
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