What is technical analysis?
It is the study of the movement of the markets, using the price and time as data. These data are represented in a graph that can be analysed jointly.
The technical analysis gives us information for decision making and also helps us to understand the movements and how they are reacting to investors in light of the events that happen in the world, for example if you give a CEO of a publicly traded company, surely will be reflected in the movement of the shares of that company.
As already mentioned, the technical analysis is based on:
1. Price: it is necessary to know the variation of prices of an asset in order to make a line graph. Is the protagonist of a graph, and this on the right side. You can see all the prices that has had a company in a given period of time only to see the graph. The time is represented in the line below the horizontal.
2. Volume: is the amount of transactions made in a given period of time. Below the price, what is more usual is to place the graphic of the volume. Many investors do not take into account the volume to make their decisions, and it is a mistake.
If it only tells us how many transactions have been made,tells us if the current trend is accelerating or not, and that is where it is relevant. Is usually represented with vertical bars.
Here we show, thanks to the tool of TradingView (has a free version, we invite you to try it out) a graph where we report the price, volume and time scale.
Figures that appear in the charts:
As you can see in the chart on TradingView, in the space larger where prices go, there are a few “sticks” of colors. They are called japanese candlestick or Candestlick in English. It is a rectangle, called the body and represents the difference between the opening price and the closing. The lines that stand out, are called wicks, and represent the maximum price and the minimum price.
They are usually used bodies green and red, although you can use the that you want. The bodies green are candles bullish, that is to say that the price opened at a level, and then he climbed in and highest peak of the initial level. And the body red, this means that the closing price was lower than that of the opening, then it was low.
Notes that do not always match the closing price or opening with the highs or low.
It is important to know that each candlestick represents a period of time, depending on which time scale you’re looking at. In the example in the previous chart, each candle represents 1 day, as it is a daily chart. But if you do day trading and use charts of 5 minutes, each candlestick will represent 5 minutes, and the same in case that you see monthly graphs, each candle is one month.
There are other types of figures that represent the price, but most of the traders use japanese candles because they are the most recommended.
It is important to take into account the following:
1. The markets discount everything: the events related to a company, whether good or bad, generates a reaction in investors that makes their actions change of price. It says that they deduct everything because it is immediate, sometimes even with just a rumor. That is to say, that there is a reaction, in advance.
2. The price reflects the negotiation between buyers and sellers: that is to say, how volatile is the action, how quickly you change the price of a company. It is said that the price is the king because you’ll be giving account for that. The price determines that you can expect of this action, for example, if you want to invest for the long term, you need something stable but if you want to do day trading you need something more volatile, because if the price moves slow goes against that strategy.
3. Prices are moved by trends: there are three, a bullish trend (that the action goes up), a bassist (that the share price is low) and a lateral (side moves within a range, but without a definite trend).
4. Markets are cyclical: the movements of prices are not going in a straight line so that everything that goes up must come down, and vice versa. Nothing is linear in the bag, even though action has an upward trend, he has his days to the poor, is cyclical.
5. Patterns: history always repeats itself, there are patterns that have some actions that tend to occur, and that is what you will notice with the observation. For example, there are tourism companies that react almost always the same in the various seasons of the year.