How to Read a Stock Market Technical Analysis

Stock charts provide a visual representation of price action.

In the stock market, the two primary methods of analysis are fundamental and technical. Fundamental analysis focuses on statistics such as market capitalization, price-to-earnings ratios and other similar measures of a company's strength. Technical analysis focuses purely on trading information such as price data, volume and readings from indicators based on this information.

Instructions

1. Familiarize yourself with common technical indicators. Technical indicators are used in conjunction with price data on a stock chart to predict future price moves. Some indicators are plotted directly on top of the stock chart while others just use stock prices in their calculations.

   Some common indicators that are plotted on top of a stock chart include fibonacci retracements, trend lines and bollinger bands. Fibonacci retracements are horizontal lines that are based on the golden ratio and are plotted from a price high or low. Trend lines are straight lines that are plotted along prices to indicate up or down trends. Bollinger bands are plotted on both sides of stock prices and are used to gauge volatility.

2. Understand the significance of technical indicators. Each indicator is used for a particular purpose and relays specific information. For example, fibonacci retracements indicate possible levels where a price reversal may take place in the future. Likewise, if prices break through a trend line, it indicates a possible reversal in the overall trend of the market. Finally, bollinger bands expand and contract to indicate increasing and decreasing volatility, respectively.

3. Learn the terminology of technical analysis. Various terms express the concepts that are illustrated visually by technical indicators. For example, you may sometimes hear analysts use the terms "support" and "resistance". These terms refer to price levels that have been identified (via indicators such as fibonacci retracements) as areas where a price trend is likely to be supported or to reverse.

   Similarly, terms like "overbought" and "oversold" refer to situations where a stock is likely overvalued or undervalued. These conditions are identified by oscillators such as stochastics or the relative strength index (RSI) when the oscillation reaches an upper or lower bound. These indicators are commonly displayed below price data in technical analysis software so that the trader can compare indicator readings with prices in a single glance.

References

• Investopedia: Overbought
• Investopedia: Fibonacci Retracement