Volatility and Technical Analysis
Volatility and technical analysis are two very important terms in investing. Volatility is the risk involved in a particular investment, and technical analysis can potentially predict the future outcome of a stock or asset. Beginners need to understand these terms, because they can help investors better grasp the stock market.
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Identification: Volatility
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A security's volatility is the estimated risk. It is represented as a statistical measure of returns with a particular security or market index. The VIX is the ticker symbol of the Chicago Board Options Exchange volatility index, and it represents the market's expected 30-day volatility. The VIX is commonly referred to as a fear gauge, because the higher the volatility, the more risk is involved.
Volatility and the Stock Market
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An option's volatility can be shown as the extent of return from the underlying asset, and fluctuation from the option purchase and the expiration date. Furthermore, the volatility of an individual stock can be represented as its beta. The beta of a stock correlates with the movement in an underlying benchmark, usually the Standard & Poor's.
A beta of less than 1 indicates a movement lower than market movement; a score of 1 indicates a movement equal to the market; and a beta above 1 indicates a higher return than the market.
However, the higher the beta, the more risky the stock, hence the risk/reward ratio. The more risk, the more potential return. For example, if a stock has a beta of 1.2, then historically the stock moves 120 percent for every 100 percent of the market movement.
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Identification: Technical Analysis
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Technical analysis is a method investors use to analyze securities or companies to determine whether to invest in them. Information analyzed is generated from market activity, such as previous stock prices, performance, trading volume, and s forth. Technical analysts use charts and other data tools to predict what the market or security will do. Technical investors believe that the past could predict the future. This is pattern analysis.
Support & Resistance
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Support and resistance refer to a technical investor's supply (seller) and demand (buyers). Support is where investors are willing to buy the stock, while resistance is where investors are looking to sell. If support and resistance trends are broken, the psychology of a stock's movement shifts, creating a new level of support and resistance.
Whole numbers are important to technical investors, because they represent turning points in these trends. For example, buyers of a security will buy large lots of stock around a major whole number that will make it difficult for the security to fall below that number--this is support. If that support level is broken, it becomes the resistance.
On the other hand, once the level of resistance is broken, it becomes the new support level. Technical analysts believe that these trends reverse rather frequently.
Warning
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The level of volatility various from security to security, as does a securities beta, which can change often. All investments involve some level of volatility or risk. Technical analysis is a methodology, which might not be suitable for every investor. Beginning investors should consult their financial advisers.
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