Stocks and Shares Basics

Stocks and Shares - Stock Market Charts Basics for Beginners

Technical Analysis

If you want to buy stocks online Technical analysis is one of two methods that investors use to decide whether to invest in a share or not (the other method is fundamental analysis -as practised so well by Warren Buffett) - it involves studying stock charts and stock market indicators with the aim of determining whether a stock price is likely to rise or fall. One of the strengths of technical analysis is the power of self-fulfilling prophecies, i.e. if enough traders believe a stock will behave in a certain way, then by their actions they can cause it to behave in the way they expected it to behave, thus proving to themselves that they were right. Because of this it is useful to have at least a basic understanding of stock market charts and indicators when trading stocks and shares , or indices or forex.

Basic Stock Market Charting Tools

OHLC Bar Charts
The OHLC bar chart is an elementary tool of technical analysis. An OHLC bar chart shows the opening price of a stock, as well as the high for the period in question (e.g. day), the low for the period in question and the closing price. The starting price is marked by a horizontal line to the left of a vertical line, the high is marked by the top of the vertical line, the low is marked by the bottom of the vertical line and the closing price is marked by a horizntal line to the right of the vertical line.

Support and Resistance Levels
A support level is a price at which a stock is said to have 'support' i.e. there are more likely to be buyers than sellers at this point and the price will either stabilize or move up. A resistance level is a price at which a stock is said to meet resistance i.e. there are more likely to be sellers than buyers at this point and the price will either stabilize or move down.

Trend Lines
A trend line is created by connecting two or more points and extending the line thus formed into the future. If prices remain above a trend line, traders consider this to be a positive signal and therefore have confidence in the uptrend. Connecting two low points where the second low point is higher than the first and extending this line into the future gives an uptrend. Connecting two high points in which the second high point is lower than the first high point and extending this line into the future is seen as being negative and if a stocktrade beneath the downward sloping line, traders expect prices to continue to fall.

Volume
Volume is the number of trades completed over a given period of time. It shows whether a stock is in demand or not.

(A 3 month chart showing OHLC bar chart, volume and 13 day moving average (red) 50 day moving average (green) and 200 day moving average (black))



Moving Averages
A moving average is merely the average stock price over a given period of time e.g. if a stock price is $1 $1.10 $1.20 $1.30 $1.40 over a 5 day period then by adding the 5 prices together and dividing by 5 we get the 5 day moving average i.e. in this case $1.20. The line formed shows the trend and by using different periods such as 5 day, 20 day, 50 day etc... we can see whether there is a divergence between the short term trend and the long term trend. Different moving average lines can be compared. If the shorter period moving average crosses over the longer period moving average whilst both are moving up this is considered a buy signal. If the shorter period moving average crosses over the longer period moving average whilst both are moving down this is considered a sell signal.

The 200 day moving average is considered particularly important. If a stock price moves above the 200 day moving average this is considered a positive sign. If a stock price moves beneath the 200 day moving average this is considered a negative sign.

For further information on technical analysis see Candlestick Charts and Stock Market Charts for Beginners

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