Traders tend to rely on technical analysis before taking any decision to buy and sell shares. Traders generally tend to look at short term, maybe for a week or a few days in which to buy and sell a share.
They maybe least interested in the fundamentals of a company, profits, dividend etc. Technical share or market analysis rely basically on the stock price data and stock market charts. So, the question often is: how to look at graphs and charts when doing technical analysis?
1) Pick stocks that have volumes
You cannot trade in shares that lack the volume. Essentially the shares should have good volumes. This is because, higher the volumes, faster the share price movement, greater is the excitement. Imagine, you have bought a share that hardly moved in 15 minutes or so.
2) Look for shares with a high beta
Look for shares that have a very high beta value. What this means is that there is a great amount of fluctuation in the share price. What is the point in buying a share that has not moved at all in the full trading day. Generally, shares with a high volume also have high beta. Today, shares that have a high beta include real estate stocks, metal stocks, PSU banking stocks etc.
3) Moving Averages
One of the most important tools that technical share market investors use is the moving averages of share prices. This could be 50-day moving average, it could be a 100-day moving average or a 200-day moving average.
A moving average of a share price is got by adding the share closing price for 50 days and then dividing the same by 50. Similarly, for 100 and 200 days.
If a stock falls below its moving average, it shows a bearish sign. Technical analysts predict a drop in the share price even further. On the other hand if a stock stays consistently above its moving average, it is a seen as a sign of strength in the stock.
4) Relative strength index
The Relative Strength index helps to gauge if a stock has been overbought or oversold. On a scale of 1-100 a relative strength index graph is plotted. If a stock is closer to 100, we say that it is overbought. So, for example, if it is placed at 80 or 90 we can safely say that it is in an overbought territory. On the other hand if it is closer to 30 or 40 we can say that it is in oversold territory.
5) Moving average convergence divergence
This is also called MACD and is one of the very important tools that technical analysts use. In this you take the 26-day exponential moving average and subtract the same from the 12-day exponential moving average. A nine day exponential moving average is than plotted above the two. This is called the signal line.
If the MACD falls below the signal line, it is a sign that people are selling the stock. So, it would mean bearishness in the stock. On the other hand if the signal line is above the MACD it suggests a bullish signal. This is one of the most important tools used by technical analysts to determine how a share price would move in the future.