Chart Analysis
Chart analysis needs not be made complicated. We can make it simple by sticking to basic technical analysis tools - drawing support and resistance lines, trendlines and channels ,and, retracement on price chart - and supporting the chart analysis with simple to understand technical indicators like MA (Moving Average), Bollinger Bands and MACD (Moving Average Convergence Divergence).
Chart analysis involves 4 basic steps.
Step 1 - Determine the long-term trend
A trade made in the direction of the underlying trend is more likely to work out than a trade made in the opposite direction. The first step in chart analysis is therefore to determine the long-term trend.
We determine the trend by looking at the price pattern in the weekly chart. A price pattern of higher highs and lows depicts an uptrend, lower highs and lows depicts a downtrend and comparable highs and lows a sideway trend.
We complement our trend analysis by looking at the slope of the 20-wk Simple Moving Average (SMA) line. When the slope of the 20-wk SMA line is rising the trend is up, when it is declining the trend is down and when it is flat the trend is sideway.
Next we check for potential trend change by looking for divergence between price and MACD. A positive divergence between price and MACD indicates a potential trend change from down to up.
Step 2 - Find the support and resistance level
Support is the price level where a price decline is likely to rebound particularly when the underlying trend is up. Buying at support level when the underlying trend is up makes sense because it represents a high probability trade.
Resistance is the price level where a price rally is likely to turn back. However when the underlying trend is up the resistance level is likely to be overcome.
We draw support and resistance lines by connecting previous highs and/or lows.
Step 3 - Determine the Entry Point
There are generally 2 entry methods - breakout or pullback.
Breakout entry is used to enter a breakout from a bottom reversal pattern (double bottoms, head & shoulders etc) and continuation pattern (triangle, flag, pennant, wedge, rectangle, etc). Pullback entry is used to enter an uptrending stock undergoing correction. It is the bread and butter for entering a swing trade.
Step 4 - Determine the reward-to-risk ratio
The reward-to-risk ratio has to be at least 2 to make the trade worthwhile. The higher ratio the better. To calculate the reward-to-risk ratio, determine the stop-loss level and price target, and, from the entry point calculate the expected reward against the expected loss. Make sure to include the brokerage fee etc. in the calculation.
Disclaimer:
Trading and investment involves risk, including possible loss of principal and other losses. I shall not be responsible for any losses or loss profit resulting from trading or investment decision based on my posting and information presented in this blog.
Chart analysis involves 4 basic steps.
Step 1 - Determine the long-term trend
A trade made in the direction of the underlying trend is more likely to work out than a trade made in the opposite direction. The first step in chart analysis is therefore to determine the long-term trend.
We determine the trend by looking at the price pattern in the weekly chart. A price pattern of higher highs and lows depicts an uptrend, lower highs and lows depicts a downtrend and comparable highs and lows a sideway trend.
We complement our trend analysis by looking at the slope of the 20-wk Simple Moving Average (SMA) line. When the slope of the 20-wk SMA line is rising the trend is up, when it is declining the trend is down and when it is flat the trend is sideway.
Next we check for potential trend change by looking for divergence between price and MACD. A positive divergence between price and MACD indicates a potential trend change from down to up.
Step 2 - Find the support and resistance level
Support is the price level where a price decline is likely to rebound particularly when the underlying trend is up. Buying at support level when the underlying trend is up makes sense because it represents a high probability trade.
Resistance is the price level where a price rally is likely to turn back. However when the underlying trend is up the resistance level is likely to be overcome.
We draw support and resistance lines by connecting previous highs and/or lows.
Step 3 - Determine the Entry Point
There are generally 2 entry methods - breakout or pullback.
Breakout entry is used to enter a breakout from a bottom reversal pattern (double bottoms, head & shoulders etc) and continuation pattern (triangle, flag, pennant, wedge, rectangle, etc). Pullback entry is used to enter an uptrending stock undergoing correction. It is the bread and butter for entering a swing trade.
Step 4 - Determine the reward-to-risk ratio
The reward-to-risk ratio has to be at least 2 to make the trade worthwhile. The higher ratio the better. To calculate the reward-to-risk ratio, determine the stop-loss level and price target, and, from the entry point calculate the expected reward against the expected loss. Make sure to include the brokerage fee etc. in the calculation.
Disclaimer:
Trading and investment involves risk, including possible loss of principal and other losses. I shall not be responsible for any losses or loss profit resulting from trading or investment decision based on my posting and information presented in this blog.
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