Learning different methods can help you decide when to purchase and when to sell a stock or derivative. Performing analysis prior to purchasing a stock or derivative will provide better understanding about the company being analyzed, sector or industry of the company being analyzed, and mechanics of the stock and derivatives markets. Three types of analysis can be done, technical, chart, and fundamental.
Chart Analysis
Chart analysis uses price points to draw trend, support, and resistance lines of how a stock’s price has moved (up, down, or sideways). Knowing how to read and create charts can help identify buy, entry, sell, or exit stock price points. A variety of features can be used to construct a chart such as lines, bars, and candlesticks. Analysis can be performed for different periods of time such as intraday, weekly, monthly, year-to-date, 5-year, 10-year, and a complete history of a stock.
Fundamental Analysis
Fundamental analysis can be used to study the reason why a stock price moves up or down or what causes a stock price to move up or down, in order to determine a stock’s real or fair market value. Fundamental analysis is done by studying the overall state of the economy then the strength of a specific industry before concentrating on individual company performance to arrive at a fair value for the stock. For stocks, financial statements are reviewed to evaluate a company’s revenues, earnings, future growth, return on equity, profit margins, and other financial data.
Technical Analysis
Technical analysis uses price patterns to examine current price movements and predict future market movements. Price patterns are distinctive formations created by the movements of a stock price on a chart and are the foundation to technical analysis. Support and resistance are two of major elements in performing technical analysis. Support indicates a low point (or floor) for a stock’s price has been set; and resistance indicates that a high point for a stock’s price has been set. Technical analysis is used to show the stock price has broken below the floor and is likely to go lower; or the stock price has moved above the ceiling and is likely to go further.
Definitions
Bearish is when one expects prolonged stock price declines.
Bullish is when one expects prolonged stock price increases.
Charts are graphical representations of data such as stock prices at different points and time.
Continuation pattern is when the price of a stock continues up or down or sideways.
Patterns are the distinctive formations created by the movements of security prices on a chart and are foundation to technical analysis.
Price point is a level at which a stock is likely to begin to significantly increase or decrease.
Resistance refers to prices on a chart that tend to as a ceiling on the stock price.
Reversal patterns are when price patterns signal a change in a stock price going up, down, or sideways.
Support refers to prices on a chart that tend to act as a floor on the stock price that prevents the stock price from moving down further.
Trendlines are lines drawn over the high or under low price point of a stock to show the prevailing direction of the stock price.
Volume represents the number of shares that have changed hands during a given day.