1. Fibonacci Retracement
• Overview: Based on the Fibonacci sequence, this theory involves drawing horizontal lines on a chart at key Fibonacci levels (23.6%, 38.2%, 50%, 61.8%, and 100%) to identify potential levels of support and resistance.
• Application: Traders use Fibonacci retracement levels to predict where the price might reverse or pause within a trend, making it a crucial tool for identifying entry and exit points.
2. Moving Averages
• Overview: Moving averages smooth out price data to identify trends by averaging the price over a specific period. They are commonly used to determine the direction of the trend and potential support or resistance levels.
• Types:
• Simple Moving Average (SMA): A straightforward average of prices over a set period.
• Exponential Moving Average (EMA): Gives more weight to recent prices, making it more responsive to price changes.
• Application: Crossovers between short-term and long-term moving averages (e.g., the Golden Cross or Death Cross) are popular signals for buy or sell decisions.
3. Relative Strength Index (RSI)
• Overview: RSI is a momentum oscillator that measures the speed and change of price movements on a scale from 0 to 100. It helps identify overbought or oversold conditions in the market.
• Interpretation:
• Overbought: RSI above 70 suggests that a stock may be overbought and due for a correction.
• Oversold: RSI below 30 indicates that a stock may be oversold and could be due for a bounce.
4. Bollinger Bands
• Overview: Created by John Bollinger, Bollinger Bands consist of a moving average (usually a 20-day SMA) and two standard deviations above and below it. The bands expand and contract based on market volatility.
• Application:
• Squeeze: When the bands contract, it signals that a breakout might be imminent.
• Breakout: When the price moves beyond the bands, it may indicate a continuation of the current trend.
5. MACD (Moving Average Convergence Divergence)
• Overview: MACD is a trend-following momentum indicator that shows the relationship between two moving averages (typically the 12-day EMA and the 26-day EMA). The MACD line is the difference between these two averages, and a signal line (usually a 9-day EMA) is plotted on top.
• Application:
• Crossover: A bullish signal occurs when the MACD line crosses above the signal line, while a bearish signal occurs when it crosses below.
• Divergence: When the MACD diverges from the price movement, it may signal a potential reversal.
6. Candlestick Patterns
• Overview: Candlestick charts represent price movements over time, with each “candle” showing the opening, closing, high, and low prices for a specific period. Candlestick patterns are used to predict future price movements based on historical price action.
• Popular Patterns:
• Doji: Indicates indecision in the market, often signaling a potential reversal.
• Hammer: A bullish reversal pattern that forms after a downtrend.
• Engulfing Pattern: When a small candle is followed by a larger candle that engulfs it, indicating a potential reversal.
7. Support and Resistance Levels
• Overview: Support levels are price levels where a stock tends to find buying interest, preventing it from falling further. Resistance levels are where a stock tends to find selling interest, preventing it from rising further.
• Application: Traders use these levels to make decisions about entry and exit points, as they often serve as psychological benchmarks in the market.
8. Head and Shoulders Pattern
• Overview: This is a reversal pattern that signals a change in trend direction. It consists of three peaks: a higher middle peak (the “head”) flanked by two lower peaks (the “shoulders”).
• Types:
• Head and Shoulders Top: Indicates a potential reversal from an uptrend to a downtrend.
• Inverse Head and Shoulders: Indicates a potential reversal from a downtrend to an uptrend.
9. Ichimoku Cloud
• Overview: The Ichimoku Cloud, also known as Ichimoku Kinko Hyo, is a comprehensive indicator that shows support and resistance levels, trend direction, and momentum all in one chart. The “cloud” itself is formed between two lines, and price action relative to the cloud indicates the strength of the trend.
• Application:
• Bullish Signal: Price above the cloud suggests an uptrend.
• Bearish Signal: Price below the cloud suggests a downtrend.
10. Volume Analysis
• Overview: Volume analysis examines the number of shares traded during a particular period to gauge the strength or weakness of a price movement. High volume typically confirms a strong price movement, while low volume may suggest a weak or unsustainable move.
• Application: Volume spikes during breakout or breakdowns can validate the movement and indicate its likely continuation.
These technical theories and tools are often used in combination to form a comprehensive analysis of market conditions. While no single method guarantees success, understanding and applying these principles can help traders make more informed decisions and improve their chances of success in the stock market.