Technical Analysis of Stocks & Commodities
Technical analysis is the art of examining stock or commodity charts to identify potential trading signals. It may appear intimidating to new investors, but it is quite easy to study and understand. Commodities and stocks traded on the stock exchanges often exhibit some patterns in their trading action. Technical analysts use such signals to enter or exit their positions in those trading instruments. Such patterns, as double bottom, double top, bull flags, or moving averages are examples of the numerous technical analysis patterns which show up on charts.
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What is Technical Analysis?
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Technical analysis is a method of stock or commodity analysis through the use of charts to predict future trends in that stock or commodity. These trading actions are recorded over time, and could be used to forecast future direction in that stock or commodity. Many patterns formed on charts often repeat over time. The following are some examples of technical analysis formations used in trading either stocks or commodities.
Double-Bottom Formation
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One of the most common formations on trading charts of stocks or commodities is the double-bottom formation. Double-bottom formation is a pattern resulting from a sharp decrease in the stock or commodity price, followed by an immediate rise in the same stock or commodity. The next phase of double-bottom formation happens when the same stock or commodity declines again for the second time and fails to go lower than the previous low. When such a formation appears, it generally signifies that a rally is about to begin. Technical analysis users may at this time initiate a buy in that stock or commodity. When a double-bottom formation appears on these trading instruments, it is regarded as a buy signal.
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Double-Top Formation
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This technical analysis indicator is the opposite of double bottom. Double-top formation signals a potential decline in the price of the stock or commodity. Double-top formation is a pattern resulting from sharp rises in the stock or commodity price, followed by an immediate decline. The next phase of double-top formation happens when the same stock or commodity rises again for the second time and fails to penetrate the previous high. When double top appears on the trading charts, technical analysis traders would sell the stock or commodity short. This position profits from declining prices. As the price of such stock or commodity declines, the price of that instrument increases in value.
Bull-Flags Formation
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Bull-flags formation follows a steep or vertical rise in the price of a stock or commodity. The bull-flag technical analysis signal consists of two parallel trend lines which form a rectangular shape that looks like a flag. It generally signifies a bull run when this pattern is confirmed. The vertical uptrend, which may precede a flag, occurs because of buyers' reactions to a company's favorable earnings report. The sharp price increase in the bull-flag formation is seen as the flagpole. Bull flags are very powerful technical analysis indicators that do not appear often on stock or commodity chart patterns.
Moving Averages
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A moving average is one of the most common indicators that technical analysts use to predict stock behavior. Moving averages are used in tracking stock or commodity trading action, for specific time periods. There are 20-day, 30-day 50-day and 200-day moving averages. The moving average for a stock is the average selling price for the stock over a set period of time. Each new day's trading data is added to the moving average and the oldest number is usually dropped. Shorter time moving averages often reflect high volatility in prices. Usually when moving average lines cross one another on the charts, it is seen as a buy or sell signal as the case may be.
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