Investing in Stocks for Beginners and Stock Charts
For beginners to stock trading looking to invest in stocks, it is important to understand at least the basics of stock charting and technical analysis.
What is
Technical Analysis ? Technical analysis on the stock market is basically looking at past prices of stocks, indexes, commodities in the form of charts.
Stock charts show where the stock price has been in the past and the trend, either up or down, in the belief that it is possible to predict where the stock price will be in the future based on the trend and various signals which can be seen in the charts.
This is not as strange as it may seem, as the way a stock price moves up or down is the result of decisions taken by a large number of humans and so the stock chart shows the result of human behaviour in graphic form.
It is also claimed that charts are capable of showing things that an actual analysis of the company's financial information will not show. As people who really do know what is happening with a company's financial situation trade the shares before everyone else, thus establishing a trend while everyone else wonders why the share price is moving up or down on no news. It is very useful for
online stock trades to understand what the charts are saying.
A basic 20 Year Chart of Barclays
Even a beginner can see that this stock chart shows that Barclays reached a peak around 750p and then dropped like a stone. It is also claimed that close analysis of this chart before Barclays plummeted would have shown that the right course of action was to sell or avoid Barclays.
Stock charts or even charts in other areas of trading, such as in
forex charting, are analysed in a number of different ways using a variety of technical indicators. The most common indicators used are
moving averages. Moving averages are merely the average share price over a given number of days, for example the 20 day moving average or the 50 day moving average.
Barclays 3 Year Chart with 20 Day (Red) and 50 Day (Green) Moving Averages
Note that before the peak in early 2007 the share price was above the 20 day and 50 day moving averages, then moved below both the 20 day and the 50 day moving averages and has stayed there more or less ever since.
If the share price falls below a particular moving average this is usually seen as a sign that the stock price will fall further. A very important moving average is the 200 day moving average, if a stock falls below its 200 day moving average this is seen as being particularly negative as it often indicates the beginning of a long-term downward trend.
2 Year Barclays Chart with 200 Day Moving Average in Black
In this chart we see that Barclays share price moved below its 200 day moving average in mid-2007 and has stayed below it ever since, for an unusually long time in fact. At the time of writing it is still far below its 200 day moving average. [UPDATE - This chart is updating automatically and it can be seen that Barclays moved back above its 200 day moving average at the end of March after bottoming out around 50p]
6 Month Barclays Chart
The share price is still well below the 200 day moving average. When the share price moves above the 200 day moving average this would be considered to be significant for the long-term trend. [Update : Barclays is now down to 93p - so even further away from that 200 day moving average - on bad banking results in the UK and the continuation of the mess and more evidence of snouts in the trough] [UPDATE : the 20 day moving average (red) crossed over the 50 day moving average (green) back in March which is generally seen as a bullish signal]
This belief in the significance of moving averages reveals the main reason why stock charts are so important and why they can tell a stock trader and also
stock market beginners, so much. Stock charts become self-fulfilling prophecies. As in the above example if a stock price falls below the 200 day moving average it is seen as negative, therefore a lot of experienced stock traders will sell when this happens, thus causing the stock price to fall further and thus fulfilling what the charts predicted i.e. because a lot of people believe it will happen, they in fact make it happen.
Similarly when a stock price moves above its 200 day moving average it is seen as a long-term positive move. It is significant in these terms of financial turmoil (2009) that a lot of banking and financial stocks moved below their 200 day moving averages a long time ago and so far do not show any sign of getting back above them.
In
online stock trading for beginners investing in stocks, using stock charts to decide on
stock trading strategies means that you do not have to know a company's financial fundamentals or understand how to read a balance sheet, you leave that to everybody else, all you neeed to understand is charts and indicators and what they mean or imply and most importantly what everybody else thinks they mean, as you as an individual stock trader will very much be a tiny cog in a very big wheel, so it is extremely important to understand what they very big cogs are thinking, and this can be seen in the charts.
There are three indicators that are very important to understand and study -
Moving Average Crossovers, when one moving average crosses over another moving average (usually when both are heading in the same direction) - see 2 Year Chart above.
Stochastics which is an oscillator, and can shown when a stock has moved too high, too fast and is thus overvalued, or has moved too low, too fast and is thus undervalued.
Volume, i.e. the number of shares traded, in general it is considered a positive sign, for those who want the share price to go up, when there is high volume on days when the stock price is moving up and low volumes on days when the stock price is moving down.
If you are interested in investing online whether a beginner or an experienced trader then you really need to get to grips with technical analysis
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