The technical analysis is a very useful tool to quickly and easily see if a share, index or commodity is interesting to buy or sell. By making a technical analysis you can compare many different stocks or other products in a very short time and get the best out of it.
The graph is nothing more than a representation of the thoughts of investors. These are driven by fear and greed and will ensure that investors buy at certain times and start selling at other times.
It may be easier than it appears in this description and this is a piece of theory about the technical analysis. If you are trained in reading charts, it is as easy as cycling. Try to describe that.
Recognize patterns in the graph
The graph itself does not really tell you that much. It is your own interpretation that makes the graph valuable. What we often see in the graph is recurring patterns formed by the buying and selling movements of the investors. Time and again it appears that the behavior of investors moves in fixed patterns and as a result becomes predictable.
If you are able to recognize those patterns then you can also see what the movement in the past has been after these patterns. There is also the big profit for the technical analyst, because if he makes his analysis right and he is good at the movement, he can earn a lot of money with it.
A number of important patterns in the technical analysis are:
- Double Top
- Double bottom
- Head and Shoulder
- Rectangle formation
- Flags and Pennants
- Triangle formation
In practice, the ‘Double Top’ and ‘Double Bottom’ are the most common. The ‘Head and Shoulder’ formation is a very powerful reversal pattern.
How do you make a technical analysis?
A technical analysis starts very easily with the creation of a graph. You can make a graph for any time you want, from a graph of one minute to a graph of a few years or even decades. Every time a new choice will have to be made with which unit of time the analysis can best be made. For an investment that is made for several months, it makes sense to take a longer time than for an investment of a few days.
Now that the graph has been made, you can see if you can discover patterns and if that is the case, you could make a prediction about what might happen next. Only that is not yet a complete and thorough analysis like the technical analysts who like to see, because also a technical analyst wants confirmation of what he reads from the graph.
Indicators for confirmations
To get that confirmation, technical analysts use indicators. These indicators are derived from price movements and analyze even more patterns that are difficult to see with the naked eye. A number of indicators analyze the movement of the price of a number of days and others again use the number of buy movements or sales movements.
One swallow does not make summer yet
Even after the confirmation of one of the indicators, a technical analyst will not immediately put all his money into a share, but he will use a number of indicators to make sure he has seen it well and that this has also been confirmed by several indicators he likes to use.
Every technical analyst has his own preferences for indicators and where one swears by the ‘Simple Moving Average’, another has nothing to do with it and prefers to use another indicator for making his technical analysis.
The most common and important indicators are:
- Simple Moving Average
- Exponential Moving Average
- Moving Average Convergence Divergence (MACD)
- Bollinger Bands
- On Balance Volume (OBV)
- Relative Strength Index (RSI)
Handy tool for creating and analyzing graphs quickly
Until a few years ago it was almost impossible to make a good analysis with graphs. All quotes had to be updated manually and a graph would take too much time. Only since the beginning of this century has it become simpler due to the use of computers and with that it has become accessible to everyone.
Technical analysis software
There are several software programs that make creating graphs very simple and there is no real preference. To make an easy analysis, there is actually only one piece of software that you should look at and that is Telechart from the Geb brothers. This software allows you to create the graph in a very simple way and to compare thousands of charts in search of the ideal shares to buy or sell.
Scans and PCFs
Telechart has two great tools that make it possible to make a technical analysis very quickly. Recognizing the patterns can even be done partially by Telechart, after which you only have to exercise control to see what might not be right. You just imagine yourself a pilot watching over the computer systems of the aircraft.
Once the course is turned off and the car pilot is on, it goes without saying.
By creating a PCF or Personal Criteria File, you can specify criteria that a graph should meet according to you. You can think of the current price relative to that of a few days before or that the volume (the number of traded shares) of the past 5 days is higher than that of the 5 days before. You cannot think of it as crazy or you can set it up. And the great thing is that many of these PCFs have already been created by being themselves or by other users.