traders use the ancient art of candlestick analysis. Candles give
investors a quick view of the market actions for a day, week, month or a
year. This technique dates back to the seventeenth century, when
Japanese traders used this method to trade rice. Today candles are used
to set up trades and spot trend reversals, but first you will need to
know how to interpret them. In order to create a candlestick chart, you
must have a data set that contains open, high, low and close values for
each time period you want to display.
3. Body of candlestick
The long thin lines above and below the body of the candle are the wicks (also called shadows or tails). The body of the candle represents the range between the opening and the closing prices. The colour of the body defines whether it was an up or a down period. In our charts we use green and red candlesticks. A long green candle represents a bullish pattern, an uptrend. This shows that the closing price was much higher than the opening one and there was a lot of buying pressure. A long red candle is a bearish pattern and it signals a downtrend. This is when the closing price is significantly lower than the opening one and sellers were aggressive. Generally speaking, the longer the body is, the more intense the buying or selling pressure. Conversely, short candlesticks indicate little price movement and represent consolidation.
And watch out for the Doji, this powerful candlestick pattern appears when the opening and closing prices are the same. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign. Alone, doji are neutral patterns. They show that neither bulls nor bears were able to gain control and a turning point could be developing.
The relevance of a doji depends on the preceding trend or
preceding candlesticks. After an advance, or long green candlestick, a
doji signals that the buying pressure is starting to weaken. After a
decline, or long red candlestick, a doji signals that selling pressure
is starting to diminish. Doji indicates that the forces of supply and
demand are becoming more evenly matched and a change in trend may be
near. Doji alone are not enough to mark a reversal and further
confirmation may be needed.
Candlesticks provide unique visual cues that make reading price action easier. Japanese Candlestick Charts allow speculators to better comprehend market sentiment, offering a greater depth of information than traditional bar charts.
Candlestick charts are used by traders to determine possible price movement based on past patterns.
Candlesticks are useful when trading as they show four price points (open, close, high, and low) throughout the period of time the trader specifies.
Many algorithms are based on the same price information shown in candlestick charts.
Trading is often dictated by emotion, which can be read in candlestick charts.
Technical analysis is the study of chart patterns and statistical figures to grasp market trends and choose stocks consequently. Sounds complicated? Here may be an easier definition. One day the share worth is up, another day it may be down. however over time, if you verify the stock price’s movement, you will see trends and patterns emerge. The study of those chart patterns and trends in stock prices is termed technical analysis of stocks. after you learn technical analysis of stocks, you may perceive the big role that technical indicators play.
Technical analysis is used by a great number of experts. All this sounds extremely complicated. An investor can easily feel it is beyond his or her understanding. However, the fundamentals of technical analysis are fairly easy if explained right. Once you know that, you can easily understand how to do technical analysis of stocks. And that is what we are going to do this section—explain the importance of technical analysis and learn technical analysis of stocks using these fundamentals.
Before we learn how to do technical analysis of stocks, let us understand two of its broad features :
History Repeats: Technical analysts believe that historical price trends tend to repeat over time. So, they sit with historical stock charts, look at price and volume information and then using trends, they try to figure out how the stock’s price may move in the future. Accordingly, they pick stocks that they feel will appreciate and sell the ones they feel will depreciate.
Technical Analysis v/s Fundamental Analysis: The technical-analysis approach to the study of stock charts is the opposite of the fundamental approach. If you were a fundamental analyst, you would study a company’s financial statements, such as the income statement and the balance sheet, to ascertain its growth potential. You would also try to monitor factors outside these financial statements that would increase the company’s earnings in the future. For example, you would keep track of the new businesses the company is investing in, the new markets it is entering, and the new technology it has adopted, and so on. Technical analysis doesn’t believe in this approach. It believes that stock prices move in circles. If you can spot the section of the circle the price is currently in, you will be able to make sound investment decisions. To identify the current stage of the price pattern, you would use some analytical tools. These include various types of stock charts, some momentum indicators and moving averages. We will get into these in detail in further sections.
Fundamentals of Technical Analysis:
In order to use technical analysis for predicting stock prices, we have to assume that there is some relationship between historical chart patterns and future stock prices. This is the only way we can meaningfully use historical data to predict future prices. There are three fundamental assumptions in the technical analysis of stocks.
Market prices reflect all the information about a stock: Earlier, we said that fundamental analysis concerns itself with financial and other information about a stock. Technical analysis of stocks, though completely detached from fundamental analysis, works on a similar premise. If you are a technical analyst, you believe that all investors are aware of everything there is to know about a stock. They actually use this information when making buy/sell decisions. This information subsequently gets reflected in the stock’s price and ultimately the stock chart. This is why they only study chart patterns to gauge market trends, and not concern themselves with fundamental factors.
Patterns tend to repeat themselves: The last assumption that validates a technical analysis is that trends are repetitive. In other words, suppose a stock chart moves in a hypothetical pattern- A-B-C. So, each time we reach ‘C’, we will again start from ‘A’, and then go to ‘B’ and eventually ‘C’. This pattern will repeat itself without fail. Only once you make this assumption can you predict future stock prices based on technical analysis. Without this assumption, there is no way to tell where the price will go next by simply looking at a chart.
Stock prices follow trends: Technical analysis of stocks is based on the idea that each stock chart has its own unique trend. Prices move only within this trend. Every move in the stock price will indicate the next move.
Let’s take the hypothetical example of a ripple. When you throw a stone in a pond, you know that consecutive ripples will get formed as soon as the stone hits the water. After a few ripples, the trend will die out. However, the next time you throw a stone, a similar ripple will appear again. Similarly, even for stock charts, you know the trend from past experiences. Naturally, the move in either direction may be larger or smaller than before, just like ripples. If you throw a larger or a smaller stone, ripples too will be larger or smaller respectively. However, the pattern of these ripples will not change dramatically.
Based on these assumptions, you can use three important technical indicators to identify market trends and predict future stock prices.
Charts: Price and volume charts are the most typical tools that are used as technical indicators for technical analysis. A volume chart depicts the number of shares of a company that were bought and sold in the market during a day. For the purpose of technical analysis, you may choose one of the traditional line or bar charts, or alternatively, use a candlestick chart. A candlestick chart is a special kind of chart that is particularly relevant for technical analysis. It is in the form of a series of consecutive candles. Charts are used together with trend lines. Trend lines indicate the direction of movement of a stock over a period of time.
Momentum Indicators: Momentum indicators are statistical figures that are calculated based on price and volume data of stocks. These technical indicators act as supporting tools to charts and moving averages. Once you are through with forming an opinion about a stock based on the other tools we have discussed, you can use these indicators to confirm your views. Some momentum indicators are signs that occur before the price move you expected occurs. They confirm that the price is indeed going to move as you thought it would. These are called leading indicators. Other signs come after the stock has started moving in a particular direction. They are called lagging indicators. They confirm that the stock will continue moving in this direction. Indicators are also used together with moving averages. For example, when a stock price moves in such a way that it starts falling within a moving average, it is a confirmatory sign that it will continue to move as expected. This is called a crossover. Other popular momentum indicator include moving average convergence divergence (MACD).
Moving Averages: Moving averages are calculated to remove sharp, frequent fluctuations in a stock chart. Sometimes, stock prices can move very sharply in a small period of time. This makes it hard to discover a trend in the stock chart. To remove the impact of this, and make a trend more prominent, an average of a few days price is calculated. For example, if a five day pattern of a stock’s price is Rs.50, 53, 47, 45 and 52, it is difficult to tell the direction in which prices have actually moved. However, if you can calculate the average of these prices and compare them with the average of the next five days and the previous five days, you can ascertain a broad trend.
This kind of moving average is called simple moving average (SMA). Other commonly used moving average concepts are exponential moving average (EMA) and linear weighted average (LWA). It may be noted though, that moving averages are calculated for longer duration than five days. Ten days and one month moving averages are more common.
Importance of Technical Analysis
Technical Analysis is gaining popularity worldwide. Here are two BIG reasons why it is so important to the analysis of financial markets:
Mathematical Approach: Technical analysts use probability to pick stocks. By using probability, they are able to predict the outcome of an action without necessarily needing to scrutinize it in great detail. So, technical analysis tells you how prices are going to move without requiring you to bother about the nitty-gritties that will cause the price to move. It is much quicker and less laborious than fundamental analysis.
Signs of upcoming danger: Sometimes, a major fall in stock prices is just around the corner but nobody can see it coming. Fundamental analysis tools are unable to predict it. However, by using historical chart patterns and other technical tools, one can predict the fall. Now naturally, technical analysis cannot tell you the reason for the fall, but it can tell you that it is about to come. You can prepare yourself for it accordingly. For example, before the 2009 financial crisis, everything was going well in the US stock markets. Nobody could say that stocks will fall so soon and so sharply. However, technical analysts predicted beforehand that markets are about to enter one of the biggest falls ever.
All of us are supposed to be planning towards our respective goals in life. We are expected to finish studies in our early 20s, get a job, buy a house by the age of 27, get a car by 29 and so on. Our capacity to dream and aim is unlimited. This needs thorough planning and execution. More than that, it needs money. Not simply earning, but also saving and investments. And to fuel our dreams, we need financial planning.
Act of managing your finances and investments is the basic idea behind financial planning. Making money is not just about earning from a job or multiple sources. It is about effective money management, saving and then investing in the right financial assets to earn more profits. Simply put, you need to make money through investments. This is the only way to roll around in money. Financial planning is the act of managing your income; setting your financial goals and then allocating your assets across investments keeping in mind your limitations and requirements.
How to Plan Financially?
Set goals -> Prioritize Goals -> Assess Current Situation -> Determine Constraints -> Form Future Strategy.
Importance of Goal Setting: How can you plan a journey without knowing where you’re going? A Goal is the first and most important step in financial and investment planning. This acts as a foundation of all the following parts of the planning process. For this reason, the process of setting your goal is important. Care must be taken that the goals are realistic and achievable.
Goal Prioritization: We rarely have only one thing to achieve in life. While planning your finances, you have to take in consideration all your goals, be it something as large as a Rs 100 crore-retirement allowance or as small as that branded T-shirt you have been eyeing on your way from work. This is why you need to prioritize your goals. They are not equally important, and some need to be achieved first. Efficient prioritization is the key to good planning.
Financial planning is not a simple task. You need to take into account multiple factors about your life – past, present and future – in order to form a feasible financial plan. Remember, for a plan to be effective, it has to be well-thought, comprehensive and with an eye on the future. Simply put, a financial plan has to be planned by individuals keeping in mind their stage in life cycle and their needs. Whoever has money and wants to utilize it in the best possible way, then financial and investment planning is a must. As the old adage goes – If one is failing to plan, they are surely planning to fail. Good and thoughtful planning is the cornerstone of an individual’s good financial health. Not enough can be said about the need for financial planning.
Wealth Management VS. Financial Planning: Wealth management and financial planning are fundamentally similar. However, there is a key difference – you can only manage wealth if you already have it. Financial planning, on the other hand, is even for those who aim to amass wealth.
Dreams and imagination are wonderful, no doubts. But we live in the reality. So, everyone has to understand their current state of life before planning for the future. In simple words, the financial plan is like a bridge connecting your today and future. So your goals and current assessment act as the platform. And you cannot have a strong bridge on rickety bases. For this reason, introspection of your current situation is the starting point to bridge the gap between the present and the future.
What should a financial plan include?
Every financial plan differs. This is because it has to be tailored to suit an individual’s needs and wants. That said, there are some components every plan should cover. While these factors should have precedence, care should be taken than other things that may affect your financial goal should also be covered.
Quantitative Analysis or Quant is a prodedure that tries to understand the behavior or Financial Markets using only mathematics. Quant rely upon statistical modeling, measurement, and research to predict the direction and speed of financial markets.
Analysis of a situation or event, especially a financial market, by means of complex mathematical and statistical modelling.
Dictionary Definition of Quantitative Analysis.
Quantitative analysis is employed for several reasons, including measurement, performance evaluation or valuation of a financial instrument, and predicting real-world events, such as changes in a country’s gross domestic product (GDP).
The stock market refers to public markets that exist for supplying, buying and selling stocks that trade on a stock exchange or over-the-counter. Stocks, conjointlycalled equities, represent halfpossessionin an exceedingly company, and therefore theexchangecould be a place wherever investors should buy and sell possession of such investible assets. Unexpeditiously functioning exchangeis taken into accountcrucial to economic development, because itofferscorporationsthe power to quickly access capital from the general public.
Purposes of the stock market – Capital and Investment financial gain
The stock exchange serves 2 vital functions. the primary is to produce capital to corporations that they will use to fund and expand their businesses. If an organization problems 1,000,000 shares of stock that originally sell for $10 a share, then that has the corporate with $10 million of capital that it will use to grow its business (minus no matter fees the corporate pays for Associate in Nursing investment bank to manage the stock offering). By giving stock shares rather than borrowing the capital required for enlargement, the corporate avoids acquisition debt and paying interest charges on it debt.
The secondary purpose the stock exchange serves is to provide investors – people who purchase stocks – the chance to share within the profits of publicly-traded corporations. Investors will take advantage of stock shopping for in one in every of 2 ways that. Some stocks pay regular dividends (a given quantity of cash per share of stock somebody owns). the opposite method investors will take advantage of shopping for stocks is by merchandising their stock for a profit if the stock value will increase from their terms. as an example, if Associate in Nursing capitalist buys shares of a company’s stock at $10 a share and therefore the value of the stock afterwards rises to $15 a share, the capitalist will then notice a five hundredth profit on their investment by merchandising their shares.
History of Stock Trading
Although stock trading dates back as far as the mid-1500s in Antwerp,
modern stock trading is generally recognized as starting with the
trading of shares in the East India Company in London.
The Early Days of Investment Trading
Throughout the 1600s, British, French, and Dutch governments provided charters to variety of firms that enclosed Malay Archipelago within the name. All merchandise brought back from the east were transported by ocean, involving risky visits typically vulnerable by severe storms and pirates. To mitigate these risks, ship owners frequently sought-after out investors to proffer funding collateral for a voyage. In return, investors received some of the financial returns complete if the ship created it back with success, loaded with merchandise available. These ar the earliest samples of limited liability firms (LLCs), and plenty of control along solely long enough for one voyage.
The East India Company
The formation of the East India Company in London eventually led to a replacement investment model, with importation firms providing stocks that primarily drawn a half possession interest within the company, which so offered investors investment returns on takings from all the voyages an organization funded, rather than simply on one trip. The new business model created it attainable for firms to arouse larger investments per share, enabling them to simply increase the scale of their shipping fleets. finance in such firms, that were usually protected against competition by royally-issued charters, became extremely popular thanks to the actual fact that investors may probably notice huge profits on their investments.
The First Shares and the First Exchange
Company shares were issued on paper, enabling investors to trade shares back and forth with other investors, however regulated exchanges didn’t exist till the formation of the London stock market (LSE) in 1773. though a big quantity of economic turmoil followed the immediate institution of the LSE, exchange commerce overall managed to survive and grow throughout the 1800s.
How Stocks are Traded – Exchanges and OTC
Most stocks are listed on exchanges like the new york securities market (NYSE) or the NASDAQ. Stock exchanges primarily give the marketplace to facilitate the buying and selling of stocks among investors. Stock exchanges are regulated by government agencies, like the Securities and Exchange Commission (SEC) within the u. s., that supervise the market so as to guard investors from monetary fraud and to stay the exchange market functioning swimmingly.
Although the overwhelming majority of stocks are listed on exchanges, some stocks are listed over the counter (OTC), wherever buyers and sellers of stocks unremarkably trade through a dealer, or “market maker”, who specifically deals with the stock. otc stocks are stocks that don’t meet the minimum worth or different necessities for being listed on exchanges.
OTC stocks aren’t subject to identical public news laws as stocks listed on exchanges, thus it’s not as simple for investors to get reliable info on the businesses issue such stocks. Stocks within the stock exchange are generally way more thinly listed than exchange-traded stocks, which suggests that investors usually should modify massive spreads between bid and raise costs for an unlisted security. In distinction, exchange-traded stocks ar way more liquid, with comparatively tiny bid-ask spreads.
Two Basic Approaches to Stock Market Investing – Value Investing and Growth Investing
There are unnumberable strategies of stock choosing that analysts and investors use, however just about all of them square measure one type or another of the 2 basic stock shopping for methods valuable finance or growth finance.
Value investors generally invest in well-established corporations that have shown steady profitableness over an extended amount of your time, which could supply regular dividend financial gain. worth finance is a lot of centered on avoiding risk than growth finance is, though worth investors do request to shop for stocks after they think about the stock value to be associate undervalued discount.
Growth investors hunt down corporations with exceptionally high growth potential, hoping to appreciate most appreciation in share value. They’re typically less involved with dividend financial gain and are a lot of willing to risk finance in comparatively young corporations. Technology stocks, attributable to their high growth potential, square measure typically favored by growth investors.