Technical Analysis of Stocks

‘History repeats itself’ goes the age old adage, and it is this very philosophy that forms the basis of technical analysis of stocks, where past price movements are used as an indicator to predict the future prices of stocks. It is basically a method of categorizing the patterns where statistical analysis of historical data is involved to forecast the performance of securities in the future. It is one of the best ways for investors to make sound decisions while making investments in the stock market as it provides a clear entry and exit signals for the investors. Though there are a few investors who entirely dismiss it as inconclusive and arbitrary, but there is a lot of empirical evidence which establishes technical analysis as one of the most reliable trading tool.
Technical analysis makes use of a variety of tools and indicators in combination with charts. So, let’s take a quick look at these tools:

• Moving Averages: This is quite a popular method which a lot of beginners and professional traders adopt, as it is very simple to understand and use. The 200-day and 50-day are perhaps the most commonly used moving averages. However, this tool does not predict any price direction. It is basically used for the purpose of determining the current direction with a lag. However, because moving averages make use of past prices, they generally prove to be poor short term trading indicator.
• Bollinger Bands: It has emerged as one of the most popular stock market analysis tool that is being widely used by traders these days. Not only is it simple but provides investors with clear signal, which is the reason why it is being on a regular basis. It is closely related to volatility and prices moves, which in turn provides traders with some shocking facts.
• Relative Strength Index (RSI): RSI is basically a momentum indicator which is employed for the purpose of measuring the speed and change of price movements in a security. Its usual movement is between 0 and 100. A stock with an RSI of over 70 is considered to be overbought. The ones with an RSI of less than 30, on the other hand, are treated as oversold.
• Fibonacci Retracement – Fans, Arcs & Time Series: These are some of the best technical tools which prove quite useful, provided you are aware of the basics.
• Ribbon Studies: This tool, along with multiple moving averages, is increasingly gaining popularity, especially among trend traders. It makes use of around 12 to 16 moving averages on one single chart.