DINEO TSAMELA: Charting your course in analysis of securities
Some traders prefer to buy and sell shares based on company and market news and after considering economic numbers. These traders are said to base their decisions on the principles of "fundamental analysis".
However, there are traders who prefer to look at the technical aspect of a security, relying on charts to figure out price movements.
Learning to read charts can be challenging. It requires you to know and understand market dynamics.
There are several different types of charts that traders can use to evaluate the direction of a stock.
Charts are used to indicate the opening and closing prices of a security, as well as its movement. However, each chart represents these differently. We'll explore the popular ones.
These are a series of solid vertical rods. Opening and closing prices are represented by dashes along the rod. A dash on the left-hand side represents the opening price, while a dash on the right denotes the closing price.
The top end of the rod represents the price high, while the bottom represents the low of the time period. This period could be an hour, a day or a week, depending on your trend analysis.
Usually, the rod's colour will denote the movement of the security. Generally speaking, black represents a rise, red represents a dip.
These charts contain shapes similar to a candle, hence the name. They're quite popular in trading circles.
Much like bar charts, they give an indication of the movement of a security as well as the opening and closing prices.
A rise or dip in the security will sometimes be indicated by green and red.
The wick, a thin vertical line, indicates the opening and closing price.
View a graph on trading below:
This is the easiest type of chart to read and is great if traders want to look at long-term trends. A line chart represents a series of closing prices over a period. Unlike the charts mentioned previously, a line chart won't give insight into intraday details.
Learning to read charts is the first step. The second is being able to identify chart patterns and interpret them. There are various types of patterns that give insight into a trend and the likely direction of a security.
It's important to understand that the chart pattern is an indicator. Be careful not to assume that a trend's indication is what will happen. Markets are uncertain, and, as such, can't be predicted. Use charts as tools, not crutches.
If you watch or attend trading seminars in which there is security analysis, you will have come across terms such as "head and shoulders", "triangles" and "gaps", to name a few. These are blanket terms used to describe a security's behaviour.
For instance, a head-and-shoulders pattern describes the reversal of an upward trend. The trend resembles the shape of the human shoulder and head, with the rise on the left and the decrease on the right-hand side.
Last is the term "moving averages". These show the average price movement over a particular period. They help traders identify trends, resistance levels and trend reversals.
The moving averages you need to gain an understanding of are simple moving averages, exponential moving averages and linear-weighted moving averages.
We won't delve into them but, as a trader, you should do a lot of reading on the different types, what they show you and how you can use them when trading.
Make use of sites such as Investopedia.com, Justonelap.com and how-to-trade.co.za. They're full of helpful articles and webinars. They'll also connect you to the greater trading community.
Tsamela is the founder of piggiebanker.com