How to Calculate Stock Chart Retracements
There are two schools of thought in terms of stock research: fundamental analysis and technical analysis. Fundamental analysis looks at a company's financial statements to compare the book value of assets or the intrinsic business value to the current market value. Technical analysis looks at historical trends in stock prices and volume to find clues about the future direction of a stock. The most commonly used tool used by technical analysts is the chart --- the ability to calculate a chart retracement is essential.
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Instructions
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Review the definition of "retracement:" the temporary price reversal that takes place within a larger trend. The longer-term trend can be either up or down.
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Use your favorite charting software to chart your stock over a one-year period. Identify whether the stock has been trending up or down. In general, if a stock is trading higher/lower than its 52-week high/low (highest/lowest price the stock was selling at in the past 52 weeks), it is trending up/down.
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Identify a point where the stock pulls back from the trend. That is, usually stocks don't continue to go down or up. They will usually "retrace" their steps for a certain period of time. See if you can spot a retracement in your stock.
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Identify the pivot points. Note the price level at which the stock pivots or retraces itself. We'll call this pivot point 1. Then mark the pivot point at which the stock continues on its longer trend. We'll call this pivot point 2. For instance, let's say you are monitoring a stock that has been trending down from $50 to $30 over the past year. You notice a small retracement at $40 (pivot point 1) up to $45 (pivot point 2), before the stock continues to go down.
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Subtract the lower pivot number from the higher pivot number. The retracement is absolute (neither positive nor negative), but can be negative or positive depending on the trend. In this case we are going to subtract $40 from $45 for difference of $5. As the retracement was going up, the retracement is positive.
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