Technical analysis approaches the price and future performance of an individual stock by looking at the stock’s charts. Fundamental analysis and investors that follow the fundamental finance theory focus on the use of a company’s financial statements when trying to determine the future movement of a stock’s share price. Technical analysis and fundamental analysis are the two main schools of thought with respect to future pricing of a share of stock. Below are four of the most important indicators that technical analyst use to determine the price movement of a stock.
50 & 200 Day Moving Average Crossover. A crossover of moving averages signals a trend reversal when one moving average crosses through another. For example, if the 50-day moving average crosses above the 200-day moving average, it is a positive sign that the price will start to increase. The short term pricing of a stock is outpacing its long term trend. The 50 and the 200 day moving averages are two of the most popular to use because they show a mid and long range movement of a stock.
Moving Average Convergence or Divergence. The moving average convergence divergence (MACD) is one of the most well known and used indicators in technical analysis. When the MACD is positive, it signals that the shorter term moving average is above the longer term moving average and suggests upward momentum. The opposite holds true when the MACD is negative.
Stochastic Oscillator. The stochastic oscillator is one of the most recognized momentum indicators used in technical analysis. The idea behind this indicator is that in an uptrend, the price should be closing near the highs of its trading range for the day which signals an upward momentum in the security’s share price. In downtrends, the price should be closing near the lows of the trading range, signaling downward momentum.
The Hammer. A Hammer is where bears drove prices lower intraday. However, the strong finish indicates that bulls regained control forming a trend reversal. Traders wanting to establish a position in a certain stock or traders that are already holding the stock can use the hammer formation to their advantage. The pattern signals a potential bullish trend reversal and are important candlesticks as they mark bottoms and support levels. Further buying pressure, and preferably on expanding volume, is needed before acting, as heavy volume will serve to confirm the validity of the reversal.
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