Technical Analysis Tools Used in Stock Trading
The Dutch stock market has been in the top tier in Europe for years. But, because there are so many stocks available, how does someone know which one to invest in? Investors use technical analysis tools to find patterns that can be used when planning an investment strategy.
Technical analysis is a trading approach that uses charts and indicators to determine when to buy or sell a company’s stock. It allows traders to take advantage of global economic events to make educated guesses on the directional movement of prices over time when buying shares. These techniques will enable traders to plan well ahead before making any trades.
This trend indicator smokes out the price by creating a constantly updated average price. It doesn’t predict price direction but instead acts as a dividing line to determine if the stock will remain in its current trend or reverse itself.
There are three types of Moving Averages: Exponential, Simple and Weighted Average Price. The exponential moving average reacts quicker to recent changes in price than other averages because more weight is given to the latest data points while old ones drop off the calculation. It’s best used for shorter periods such as 15-day, 30-day and 60-day averages.
A simple moving average gives equal weighting to all of the data in its calculation. It makes it perfect for more extended periods such as 25-day, 50-day or 200-day averages. The weighted average price is an amalgam of the simple and exponential moving averages. The weighted average gives more weight to recent data points while simultaneously lessening the impact of older ones.
RSI (Relative Strength Index)
The Relative Strength Index indicator, or RSI, is used by traders to determine when an asset is overbought or oversold concerning its highs and lows. If used correctly, this can help forecast future price direction for any given security. RSI measures the magnitude of recent gains versus losses over a specified period. This measurement falls between 0 and 100 per cent, with readings above 70 per cent signalling overbought conditions and below 30 per cent indicating oversold territory.
Bollinger Bands consist of three lines: middle, upper, and lower. The middle band is the average true range (ATR) over some time, such as ten days or 20 days. Through this, you can get an idea of the expected price range for the stock concerning its high-low price extremes.
The upper and lower bands are positioned at X standard deviations above and below the middle band. Standard deviation is an indicator used in statistics to measure volatility based on historical data – it’s one-way traders can predict future volatility by looking at past performances. So, when prices reach either end of the Bollinger Band, this is a warning it may be due to reverting towards the middle.
Bollinger Bands with EMAs
Bollinger bands are usually plotted with a closing price. However, you can also use EMAs (exponential moving averages) like the 20-day EMA and 50-day EMA to provide additional support or resistance levels. When prices reach either end of these EMAs – especially the 20-day EMA – it’s a warning that they may be due for a move back towards the middle between the Bollinger Bands.
Moving Average Convergence Divergence
It’s an indicator used by traders to measure momentum and trend strength. It consists of two exponential moving averages plotted on top of one another. The difference between them is how much bullish or bearish momentum is present with the shorter EMA (12-day) acting as a signal line. The longer EMA (26-day) provides support and resistance levels for trend strength.
Stock charts are designed to help traders predict future price movements by analysing certain factors with each point plotted on the chart. One of the more important is the Stochastic Oscillator, which shows where current closing prices fall concerning previous highs and lows over a specified period. It uses standard deviation based on open, high, low and close values from a given time range such as 14 days or 200 days. This indicator fluctuates between 0 and 100 per cent, with readings above 80 per cent signalling overbought conditions and readings below 20 per cent indicating oversold territory.