We learnt in the previous article that there are two approaches to finding a market viewpoint and used analogies to assist you to understand.
I’m assuming you’ve read our prior article, so let’s continue our conversation.
Fundamental analysis is concerned with whether a stock is overvalued or undervalued, whereas technical analysis is simply concerned with historical data.
The Assumptions of Technical Analysis
If you’re undertaking technical analysis, you’ll need to consider the following assumptions:
1. History tends to repeat itself.
2. Price moves in the tread.
3. The ‘how’ is more crucial than the ‘why.’
4. Everything is discounted in the markets.”
History repeats itself: One of the assumptions is that what happened an year ago is likely to happen again, i.e., if stocks fall at a certain price, they are likely to fall again.
Price Movement Trends: Once The Trend has been established. It might be on an upward or downward trend. It will continue to travel in the same direction.
The ‘how’ matters more than the ‘why’: Technical analysis is not concerned with why individuals purchase or sell stocks; rather, it is concerned with how prices will react to these activities.
Markets discount everything: If some big players are buying stocks, technical analysts will find out about it before others by observing price moments, which is why markets discount everything. Everything is discounted in the market.
Understanding Candlestick Charts
Have you ever wondered why candlestick charts are famous in the trading industry?
Technical Analysis helps you analyze the charts. You can draw the prices using a line chart as well and analyze the price movement but a candlestick chart gives you added dimensions to the stock prices.
The candlesticks pattern was developed by the Japanese to visualize quickly what happening in minutes, hours, days, and years Frames through single or multiple candlesticks.
These dimensions are Open, High, Low and Close of the stock. These helps us analyze prices and understand the mass psychology in a better way.
Let me show you how a candlestick looks like on a daily chart:
The green body represents that the market closed at a higher price than its open price while the red body represents that the market closed at a lower price than its open price. The tip of the upper shadow represents the maximum price that the stock reached that particular day while the tip of the lower shadow represents the low of the day.
We will learn more about candlestick charts in the upcoming article.
Until then, Stay Tuned!
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