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While it does take time to become proficient at applying technical
analysis (or 'charting'), below are some basic ideas to help the
reader get started in chart reading. These concepts (and others)
will be used in charts throughout TheMarket.co.za's
weekly analysis report.
The building blocks of a chart:
- One of the main premises of technical analysis is that 'market
action discounts everything' i.e. anything that can affect the
price of a stock/index/currency etc is already reflected in the
price itself. Price movement, then, is really a reflection of
shifts in current supply and demand - if demand exceeds supply,
the price rises. If supply exceeds demand, the price falls.
THREE TYPES OF CHARTS ARE:
| 1. Line Chart - |
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| Connects closing prices only |
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| 2. Bar Chart - |
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- Each 'bar' is the price range for one period (e.g.
day, week etc).
- Shows the high, low, close and open of the period.
- The dash "-" on right side of bar is closing price,
and on left side is opening price.
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| 3. Candlestick Chart
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- Similar to bar chart, but emphasises the open - close
relationship.
- Hollow candle (green):
close is higher than open = an up-day
- Filled-in candle (red):
close is lower than open = a down-day
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BASIC CHARTING TECHNIQUES:
| Trendlines - |
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- They connect significant bottoms to each other (ie.support
trendlines) or significant tops to each other (ie.resistance
trendlines).
- Prices tend to 'bounce' off trendlines. Breakouts
are violent.
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| Moving Averages - |
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- Is the "average" price over X-number of time periods.
- A closing price above moving ave. is bullish;
below it is bearish.
- Think of it as a 'moving' trendline.
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| Oscillators - |
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- The oscillator on top (e.g. Stochastic, Relative
Strength Index) is based on a math formula that
measures price relative to where it was X-number of
time periods ago.
- Significant turning points in price often occur when
the oscillator reverses at oversold (market
bottoms) or overbought levels (market
tops).
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- Trendlines, moving averages, and oscillators will be used in
our weekly analysis report, as well as other techniques of technical
analysis, such as traditional chart patterns, Japanese candlestick
patterns, Fibonacci studies, and Elliot Wave.
- The emphasis, however, will always be on simplicity and clarity
of analysis, without ever compromising on accuracy and precision.
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