Analysing stock charts: technical analysis and chart patterns

Stock analysis is an essential part of trading and investing in the stock market. It involves evaluating a company’s financial performance, market trends and industry outlook to make informed decisions about buying or selling stocks. 

While fundamental analysis focuses on a company’s financial health, technical analysis looks at historical price movements through charts and patterns to predict future price movements. This article will discuss how to analyse stock charts using technical analysis and chart patterns in Singapore.

Understand the basics of technical analysis

When choosing a stock to trade, it is crucial to understand the basics of technical analysis. Technical analysis is based on the premise that stock prices move in trends and that history repeats itself. It uses charts and patterns to identify potential buying or selling opportunities. The three basic principles of technical analysis are:

Price reflects everything

This principle suggests that all known information about a company, including its financial performance and market trends, is already reflected in its stock price. Therefore, technical analysts focus on studying price movements to make trading decisions.

Price moves in trends

Stock prices tend to move in a particular direction for an extended period. Technical analysts use trend lines to identify the direction of the trend and potential reversal points.

History repeats itself

Technical analysis is based on the belief that history tends to repeat itself. By studying past price movements, technical analysts look for patterns that can help predict future price movements.

Analyse charts using technical indicators

Technical indicators are mathematical calculations applied to stock charts to identify potential entry and exit points. There are two types of indicators: leading and lagging indicators. Leading indicators attempt to predict future price movements while lagging indicators confirm trends that have already formed. Examples of technical indicators include moving averages, Relative Strength Index (RSI), and Bollinger Bands.

Moving averages are the most commonly used technical indicator. They smooth out price fluctuations to identify the direction of the trend. A 200-day moving average is often used to determine long-term trend direction, while a 50-day moving average is used for short-term trends.

RSI measures the speed and change of price movements to indicate overbought or oversold conditions. An RSI reading above 70 suggests that a stock may be overbought, while an RSI reading below 30 indicates it may be oversold.

Bollinger Bands consist of three lines on a chart: a simple moving average, an upper, and a lower band. The upper and lower bands represent two standard deviations above and below the moving average. Bollinger Bands can help identify potential breakouts or reversals.

Identify chart patterns

Price movements on a stock chart form patterns and can provide valuable insights into a stock’s future direction. Some common chart patterns include:

Head and shoulder pattern

This pattern resembles a head with two shoulders, signalling a potential trend reversal from bullish to bearish.

Cup and Handle pattern

This pattern resembles a cup with a handle on the right side and indicates a potential uptrend continuation.

Double Top/Bottom

These patterns indicate a potential trend reversal. A double top is formed when the stock reaches two similar highs, while a double bottom occurs when the stock hits two identical lows.

Analyse volume

Volume is a crucial aspect of technical analysis as it indicates the level of interest in a stock. It measures the number of shares traded over a specific period and can provide valuable insights into price movements.

High volume typically accompanies significant price movements, indicating increased buying or selling pressure. A rise in price with high volume suggests that buyers are in control, while a drop in price with high volume shows that sellers dominate the market.

Traders also look for volume divergences, where the price and volume move in opposite directions. It can signal a potential reversal or continuation of a trend.

Evaluate multiple timeframes

Analysing stock charts using technical analysis should not be limited to one timeframe. Looking at multiple timeframes can provide a better understanding of price movements and help identify potential trends and reversals. For example, analysing a daily chart for long-term trends and a 30-minute chart for short-term trends can provide a more comprehensive view of a stock’s price movements.

It is crucial to note that patterns and indicators may appear differently on different timeframes. Therefore, it is essential to evaluate multiple timeframes before making trading decisions.

Combine technical and fundamental analysis

While technical analysis focuses on price movements, fundamental analysis looks at a company’s financial health and market trends. Combining both approaches can provide a more comprehensive analysis of a stock’s potential. For example, if technical analysis suggests a bullish trend while fundamental analysis indicates a company’s declining financials, it may be wise to avoid trading that stock.

Traders should also consider other factors, such as news, market sentiment, and economic indicators, when using technical analysis to analyse stock charts.