Mar 24

How to carry out technical analysis of stocks

Reading Time: 2 mins

In order to make informed investment decisions there are two main types of analysis which can be undertaken. Fundamental analysis looks at many aspects of a company such as balance sheets and other financial data to estimate its value before deciding whether to invest in such stocks or not.

Technical analysis however, only really looks at the price movements in the market. It usually only focuses on a relatively short period, usually no longer than a month. If you’re hoping to carry out a technical analysis of stocks to make informed decisions then here is how to get started.

Accurately Read Charts to Spot Trends

Technical analysists evaluate charts and graphs of security prices to work out in what direction prices are going. Spotting a trend is done by looking at the different types and their durations. Major trends last at least a year, intermediate trends last at least a month but less than a year and near-term trends last less than a month.

Up trends are characterised by highs and lows that slowly become higher, down trends are the opposite and horizontal trends are when successive highs and lows fail to change much. Analysts use four types of charts to plot stock prices over a certain period of time.

Understand Support and Resistance

When you can spot a trend it is important to grasp the concept of support and resistance. Support is the lowest price a security will reach before buyers jump in and drive the price back up again, whereas resistance is the highest price it will reach before owners sell so the price falls.

These fluctuate often and are used to spot the existence of a trend and see when it starts to reverse itself. Support and resistance prices are usually given in round numbers and in some cases it can be possible for stock prices to rise above or below support and resistance levels.

Look at Trade Volumes

The amount of buying and selling going on is a good indicator of a trend establishing itself or beginning to reverse and must be paid attention to when conducting a technical analysis of stocks. If the trading volume increases as the price does then it is a firm indicator that the trend is real.

However, if the trading volume only increases slightly as the price goes up then the trend is usually set to begin reversing. These basic points should help get you started carrying out technical analysis of stocks.


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