Technical analysis is a method used to predict financial market behaviour by studying the history of price movement. Technical analysts believe that specific trends and patterns will repeat themselves repeatedly, allowing them to correctly predict future price movements to gain profit. As such, investment using technical tools is an increasingly popular way to invest in England’s stock markets.
Traders can find several technical tools in England’s stock market. Among them is one of the oldest known indicators, Stochastics. This indicator measures the price momentum by comparing the closing price to its price range over some time. A calculation is made using this information which reflects where prices might head next. It usually peaks at 80% or 20% levels, indicating overbought or oversold markets, respectively.
Numerous other technical tools are implemented in stock trading. The following list covers a few of the most common and will be discussed briefly:
Candlestick charts allow for a large amount of data to be condensed in a relatively small area, allowing for easier comparison and analysis. This data includes open/close prices, high/low prices, opening/closing volume, and moving averages. By combining several different types of candles into one chart, it is possible to compare stocks with very different trading patterns over time by simply observing the candles.
For example, “Harley Davidson” may have a large amount of daily volatility compared to an index such as “the Dow Jones”, which would create a candle chart where Harley Davidson’s candles were much larger than the index candles.
Moving averages is one of the simplest technical indicators used to determine what stock prices are doing over time. It calculates an average price for a past number of periods and then plots that value on the chart, which generates a line (the plot) that changes based on new information. When new information contradicts older data, that value will gradually change until it settles in around the correct estimation of where the stock should be trading at.
For example, if a stock is being calculated from 9 am-5 pm with a moving average of 200 periods. Then there is some breaking news that causes an abrupt spike in trading early in the day, and once it has calmed down again after 4 hours, there may be a new moving average plotted, the end result being the moving average was flawed for most of that day.
The most basic technical tools use high low prices associated with an individual stock to gauge what price points attract traders’ attention. This is done using different colours on the candlestick chart, making changes better visible.
For example, when there is heavy buying at a certain point, which also coincides with good news about the company in question, someone may have reason to believe it will continue operating successfully, which would prompt them to invest more. The same holds true in reverse if there is bad news associated with a company being traded; investors would sell their stocks due to concern over future performance or lack of faith in management.
This is the amount of trading that occurs over a specific period. Generally, there are standard measurements for each interval, e.g. 1 minute, 5 minutes, 15 minutes etc. This metric is used to analyse further what points on the chart attract the most attention, usually, because traders believe prices will rise/fall or simply because it has recently become popular to trade in that area due to heavy buying/selling.
Technical tools can be used for many different types of assets, including stocks and shares, currencies and commodities. However, you must understand what you are getting into before investing with these tools. Beginner traders are advised to use a reputable online broker from Saxo Bank and trade on a demo account before investing their money.