Trading Directly from Charts – an Effective Way of Trading

Whether to invest in a stock, or not, depends on two key parameters— fundamental analysis and technical analysis. Fundamental analysis takes a macro view and looks at economic and financial factors that influence a business. It is a study about the business and the market as a whole. Technical analysis takes a micro stance instead and looks at the price movement of a security, and uses this data to attempt to predict future price movements. Both these approaches have their share of loyalists who vouch for their preferred choice. However, the fact is, to arrive at wise investment decisions, these two have to be considered as complementing each other.

There are investors, who track the stocks’ movements and time them within the day—the day traders. They rely on technical analysis to make an ideal entry into and exit from the market. Let us try to understand how one can trade effectively using technical charts.

Technical charts are indicators that signify heaps of data captured over time through interesting graphs. These data represent loads of information that is broken down to gain valuable information—identifying trends and indicating signals, making trading meaningful. Technical indicators are mathematical calculations that can be applied to the past patterns of stocks, and are extensively used by active traders as they are designed for analyzing short-term price movements. These hold no or little value to the long-term investor. If you are someone who wants to trade from charts, these are the four most common technical charts that hold the most value in stock trading:

Moving Averages

These are a group of trend indicators that take into account the strength and direction of a trend using a method of averaging price, which then provides a baseline. As the prices move above the baseline, they can be considered to be bullish, and vice versa. Stock trading using these not only identifies the trends for the trader, but also enables them to decide the right time to buy or sell a stock.

Moving Average Convergence Divergence (MACD)

The MACD is an all-encompassing technical indicator, as it combines both trend and momentum. It is used to identify the strength, duration, and direction of a trend in a stock’s price movement. Along with identifying the overbought and oversold stocks, it signals the right time of entry and exit.

Relative Strength Index (RSI)

The Relative Strength Index (RSI) is also called an oscillator and is basically a momentum indicator. It helps you to credibly identify the speed of the price movement by comparing prices over time. The RSI also measures the stock’s recent trading strength, the velocity of change in the trend, and the magnitude of the move. In simple words, it lets you know if the stock you are looking at is overbought or oversold. If you use this indicator for trading from charts, you’ll know whether it’s prudent to buy or sell a stock.

Stochastic Oscillator

Similar to the RSI, the Stochastic too is a momentum indicator in the sense that it gives an idea if a stock is overbought or oversold, with a relatively higher level of reliability than the RSI.

Technical charts fuel day-trading in a big way, and are a trader’s best friends. If you are looking at a stock for the purpose of intraday trading, learn more about technical analysis. Foundational knowledge of some of these basic indicators will benefit you a great deal while attempting to trade directly from charts.

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