Understanding Technical Analysis Tools

It’s okay, you can say it – trading is complicated. This is especially true for investors who don’t take up the task of understanding the differences in the market and options available to them. Some traders simply depend on the news about specific markets and companies, while there are others that move based on advice from family and friends or an investment writer.

However, it’s the traders who commit to learning strategies and developing their trading knowledge that is more successful. Such traders are better able to analyze opportunities in the market because they utilize and understand analytical tools.

What are Technical Analysis Tools Available?

Probably the first tool a stock investor will be exposed to and need to understand is the standard stock “ticker” that everyone is used to seeing on websites and the building of the New York Stock Exchange. A standard stock ticker provides the following information:

• Company/Investment stock symbol
• Price quote
• Net change in value
• Per cent change in value

The stock ticker is helpful when tracking an individual investment status, as updates are continuous throughout the day.

Basic charts:

Investors and day traders can detect trends in a particular stock through basic charts such as 52-week price history and 52-week volume history. To optimise the use of these charts some tools allow selection of the period to provide better values. Traders can then import such data into software like Excel to better analyse the history.

With help from more technical analysis techniques and tools such as indicators, traders can be provided with better insight into securities. The more familiar traders become with indicators and their use the better investment decisions can be made.

Volume indicators give traders a view of a stock’s trends over time against its recent movements.

Accumulation/Distribution Line – A momentum indicator, the accumulation/distribution line is used to gauge the supply and demand of securities. This chart identifies and confirms a stable trend by identifying the divergence of the security’s price and its volume movement. A downtrend in a security’s price with an uptrend accumulation/distribution line may indicate that there is buying pressure. This means that the price may reverse and turn into an uptrend. On the other hand, if a security’s price is in an uptrend and the accumulation/distribution line is on a downtrend, this may indicate selling pressure. Due to the high selling pressure, the security’s price may reverse and turn into a downtrend.

The volume-weighted average price (VWAP) –This indicator takes into account volume and provides a more accurate picture of a security’s average price providing the average volume price of the day. The VWAP works by recording every closed transaction within a specified period to give a volume-weighted average price and is displayed as a line like those seen when using other moving averages. VWAP is used by investors and traders purchasing and selling large shares. This trading tool allows those investing in large shares to execute a buy or sell without disturbing market prices. Instead of making one big transaction and drastically affecting the stock price, VWAP permits investors to move into the stock over the course of a day. Also, used in algorithmic trading, VWAP can signal a momentum shift in the share price of a security and gives brokers the ability to ensure clients of the execution of a trade near to a particular price volume.

Moving Average Convergence Divergence (MACD) – This indicator is more technically-complex but provides the investor with both momentum and trending signals of a particular security. The MACD comprises two exponential moving averages (EMA) from two varying time periods to measure the movement of the security. The result is the difference of the averages which are typically 12-period and 26-period. Conceptually, the two moving averages offer a look at the short-term vs long-term movement to predict the security’s future direction.

Relative Strength Index (RSI) – The RSI is an indicator that measures the extent of recent price changes to identify overbought or oversold trading conditions. This indicator has values ranging from 0 to 100. 0 signals the highest oversold condition, while 100 signals the highest overbought condition. The RSI is often used with other confirming indicators as sudden large price movements can create a false buy or sell signal.

On-Balance Volume (OBV) – This is an easy way of indicating a security’s volume over a period relative to its price. The idea behind this indicator is that a change in rate will follow a change in volume. So, an increase in OBV but a decrease in price over a period provides a sign that the security will see a reduction in volume but an increase in rate. On the opposite side, a declining OBV with increasing rate over a period will indicate increased volume when prices are actually on a decline.

There are many analytical tools available to traders and investors. Read more about tips and tools to help your day trading career by visiting the DayTraderPro Blog!

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