INSUBCONTINENT EXCLUSIVE:
A picture is worth a thousand words.
This famous saying sits so perfectly for chart reading in the financial world
A chart is nothing but graphical representation of data
Financial markets come alive through the eyes of charts, and this is precisely the reason why it keeps the interest factor alive for
everyone, whether he is a beginner or an advanced trader or analyst.
These technical charts can help market participants identify the
support and resistance level of a particular scrip and take buy-sell decisions
There can be many variations, but the basic idea of using the charts is mainly to identify a trend
The most important thing chart reading helps you with is trend identification and second, risk management
Risk management depends on how effective chart reading is
Below are six basic technical indicators that can help spot a market trend.
Moving averages: It is one of the simplest and most powerful
tools, given its wide applicability
This helps in smoothening price data by forming a single flowing line
The line basically represents the average price movement over a period of time
Moving averages can also provide support or resistance to price levels
These can be a simple moving average (SMA) and exponential moving average (EMA)
SMA is calculated by dividing the sum of a set of prices by their total number in the series
For example, a 10-period moving average can be calculated by adding the following 10 prices together and then, dividing the result by 10
SMA assigns equal weights to all values
On the other hand, EMAs place a higher weighting on recent data than older data and these are more reactive to the latest price changes than
widely used by traders across the world due to its overall simplification of identifying the overall trend
It is the difference between the 26-day and 12-day exponential moving averages
When the MACD falls below the signal line, it sends out a bearish signal on the charts, indicating that the price of the security may
experience a downturn, and vice versa.
Bollinger Bands: Bollinger Bands are based on the study of price variations from an average
The average is plotted and two bands using volatility of a stock is plotted above and below that, which factors in two standard deviation
The period for a moving average used is usually 20 days that can be changed and the calculation is as same as the simple average
Since it's an indicator that works according to volatility, one needs to be careful while using it as it can have various implications on
prices in short as well as long term
It is widely used for gauging the trend with support and resistance based on the bands.
Stochastic Oscillator: The Stochastic indicator
denotes momentum and trend strength
Unlike its name which confuses many newbies, it is an oscillator that can be used for not just commodities but indices, ETF or stocks
It helps in identifying the overbought and oversold conditions and when a trend may begin
It oscillates between 100 to -100 and can go beyond that, but usually these levels beyond the 100 range either side indicates extremely
technical analysts that deal in volumes -- one of the most important and often overlooked indicators used for confirmation of a trend
On-Balance-Volume (OBV), developed by Joseph Granville, is one of such metrics most widely used
The line is started with an arbitrary number, which rises and falls depending on what the price does
The volume for the day is added when the price goes up and subtracted when it falls
In other words, OBV is simply the running total of positive and negative volume
Granville noted in his research that OBV would often move before prices
Expect share prices to move higher if OBV is rising and vice versa.
(Disclaimer: The graphs used are for the purpose of illustration only
