Technical analysis tools and techniques
Technical analysis is a security analysis methodology for forecasting the direction of a share price through the study of past market data, primarily price and volume. The price movements reflect the forces of supply and demand.
Price support and resistance
Price support and resistance points on charts is as an intersection of where demand and supply for a stock meet. Support is the point on the chart where buyer demand is thought to be strong enough to stop the price falling further. Resistance is the point where selling is strong enough to prevent the price rising further.
Momentum trading
Momentum trading involves buying or selling stocks that are moving strongly in one direction, usually on high volume. The momentum trader prefers to let a trend dictate their strategy. A momentum trader will buy rising stocks and sell falling ones.
Using stop-loss orders
By identifying support and resistance levels, investors are able to effectively manage their entry and exit points for buying and selling shares. One way to do that is to utilise a stop-loss order which is a predetermined price point at which a technical analyst sells a stock to limit losses and protect capital.
Pros
- While fundamental analysis can help investors decide what to buy and sell, technical analysis can help investors decide when to buy and sell.
- Momentum trading techniques can help long-term portfolio investors - they can use these techniques to buy stocks when they are rising and protect their capital by selling stocks when they break long-term uptrends and head lower.
Cons
- Although it looks easy, charting, like most investment techniques, requires education and experience.
- Making investments based on a quick glance of a share price chart is dangerous, just as relying on “hot stock tips” is a poor form of fundamental analysis.
Things to consider
Charting patterns can be hard to identify, look different depending on the timeframe, and change quickly.
There is no guarantee that a price pattern will continue: the key is being able to respond to market action in a stock, not trying to predict it.
Next steps Technical analysis and nabtrade
nabtrade provides a powerful set of tools, data and research to help investors conduct technical analysis research.
Our tools include:
- Global scanner
- Charts for each company
Visit Platform & Tools to find out more.