Posted on 16 October 2012.
Stock charting and technical analysis focus on how price action can predict stock movements, rather than why stocks move. Stock charting and technical analysis includes a variety of methods that all try to attempt to predict the near term future movement of a stock’s price based on indications provided by the stock’s chart and in some cases other factors, such as trading volume and the sentiment of stock market participants.
Stock charting and technical analysis ignores unexpected external factors that can affect stock prices, such as unexpected negative news, and instead focuses on clues that charting patterns provide regarding the possible near term movement of a stock. Stock traders use stock charting and technical analysis to make trading decisions regarding when to buy and sell stocks, and where to place stop loss orders.
While not a fool-proof method of trading stocks, stock charting and technical analysis can be quite helpful with guiding traders regarding the price levels to buy and sell stocks, and where stop loss orders should be placed to protect either trading profits or trading capital.
For example, a stock trader that is considering buying a stock that has suffered a steep sell off and is looking to catch a bounce in the stock’s price to make a quick profit needs to figure out when to buy the stock, at what price a stop loss order should be entered to protect their trade from a loss, and at what price a sell limit order should be entered to book a profit from the trade. Stock charting and technical analysis can be utilized to answer these three important stock trading questions. If a stock is selling off, a stock trader will look for a flattening in the chart and a drop off in volume as charting and technical analysis clues that the sell off has run its course and it is time to buy the stock. This apparent bottom can also be used as a price level to place a stop loss order to protect the trade from losses, since if the level is broken to the downside, the stock may suffer continued declines. Where to place a sell order can also be determined using stock charting and technical analysis. Past levels of resistance (price levels that stocks have trouble moving higher through) are clearly shown on charts. Placing a sell order just below the nearest resistance price level is a good way to exit a trade without having to wait for the stock to breakout to the upside through resistance.
Stock charting and technical analysis is a powerful tool that can increase the chances of trading stocks successfully. While stocks prices can be affected by many unexpected factors that are not taken into consideration by stock charting and technical analysis, more often than not, stock charting and technical analysis provides accurate guidance regarding when to make trades and where to place buy, sell, and stop loss orders.
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