Technical analysis of stock trends

Technical analysis is one of the approaches, along with fundamental analysis, used to determine current market conditions and predict future price movements. Although technical analysis is represented by a certain set of indicators, patterns, and tools, the analysis of stock trends, the same as the stock market itself, has unique features.

For instance, the Indian stock market is managed by the Securities Exchange Board of India (SEBI). It sets strict rules for market makers, which create stock market trends.  The US stock market may operate differently as it’s controlled by the Securities and Exchange Commission (SEC). 

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Read on to discover how to apply technical analysis to the stock market. 

Technical tools

As you are reading this article to learn how to define stock trends, it’s worth starting with the trendline definition. 

A trendline is a line drawn through at least two highs or lows to frame the asset’s price direction.

If you see the price forms higher highs and higher lows, you can connect them. As a result, you will get frames of the upward channel that will help you define the points where the price will likely rebound next time, so-called support and resistance levels. Vice versa, you can draw a downward channel connecting lower highs and lower lows. 

Trendlines can be drawn on any timeframe. However, you should remember that the stock market is highly volatile. Therefore, it will be harder to draw them on smaller periods in which the price changes too often. It’s recommended to place trends on larger timeframes, as they’re more reliable there.   

Support and resistance boundaries also have unique features when applied to the stock price chart. 

  • A support level is a line drawn through minimums to define the points where the price will reverse up. 
  • A resistance level is a line drawn through maximums to determine the points where the price will reverse down. 
What is technical analysis of financial markets?

These are general rules. However, you remember that stocks experience high volatility. Therefore, the price may break support and resistance boundaries — it will be either a breakout or a fakeout. 

A fakeout is a dangerous market condition in which you open a trade in the breakout direction, but market participants don’t have enough power to push the price further. As a result, it turns around and keeps moving in the same direction. The easiest way to confirm the breakout is to trade it on a chart or candlestick pattern. 

Patterns

A chart pattern is a subjective form that reminds one of a well-known thing. For instance, there are head and shoulders, inverted head and shoulders, double top and bottom, and triangle patterns. Patterns help define support and resistance levels that should be broken to determine an upcoming price direction. 

When trading on the stock market, you can use the patterns mentioned above, as they are the most popular and effective. They may occur on various timeframes. Therefore, both day traders and long-term traders can find entry and exit signals easily. Traders should be careful, as significant price volumes of the stock market make patterns short-term — their signals are worked out fast.  

There are also candlestick patterns. It’s more difficult to determine them, as the stock price is supposed to fluctuate widely. There are many Doji candles on the price chart. Also, high volatility will create many candlesticks with long shadows. It’s important to find confirmations via indicators’ signals.  

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Indicators

With a wide range of indicators, it’s not easy to determine those that will be effective for stocks. However, you can always apply standard tools that have confirmed their effectiveness for any market. 

7 candlestick patterns every trader should know

These are simple and exponential moving averages, as well as the MACD indicator, Relative Strength Index, and Stochastic Oscillator. You should apply volume indicators, as the stock market differs with significant price volumes. You can use standard volumes and on-balance volume tools. 

As it may be hard to determine trends due to the high degree of market volatility, it’s worth implementing indicators that help define the trend’s existence and its direction. The Average Directional Index and Aroon Oscillator are the most effective tools.  

Takeaway

Although you can use standard tools and indicators to determine trends in the stock price, you should keep in mind the features of the equity market. Stocks are highly volatile; therefore, chart patterns are worked out faster. It’s important to apply additional tools to define market trends and price volatility.

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