Introduction to Technical Analysis and Candlesticks

Introduction to Technical Analysis

Technical Analysis (TA) can be used in place where historical data is available. The historical data is must in TA because we use the past price movement of the stock and determine the future price. Here we use data like the Open, High, Low and Closing price of a stock.

• Open - After market opens this is the first price at which a stock is traded.
• High - It is the highest price at a which a stock is traded on that day.
• Low - It is the lowest price at a which a stock is traded on that day.
• Close - It is the last price at which a stock is traded on that day, this is the price when the market gets closed. 

Technical Analysis can be used to find the trend of the stock. It will be helpful for finding the correct entry and exit points. Once the trend, entry and exit points are clearly found out, then one can make a profitable trade. Technical Analysis is based on the fact that "history repeats itself". TA is only applicable for short term, for long term one must definitely do the Fundamental Analysis and it will also be covered in the upcoming posts after the TA series. For TA, we use charts, candlestick patterns, support and resistance levels, volumes, indicators and many more. 

Technical Analysis VS Fundamental Analysis

Fundamental Analysis we analyze the company's management, financials, type of service/product the company is selling and their market share in that industry. It's must for long term investing.

Technical analysis is purely based on charts and price action. It is only suitable for short term investing.

One may use a combination of both, technically analyzing a fundamentally strong company for short term trades, so that the gains will be better and trades will be safe. For long term only fundamental analysis is sufficient. 

Introduction to candlesticks

The candlesticks are one of the oldest methods of price analysis. It originated from Japan. Candlesticks show us the open, high, low and closing price of a stock. There are mainly two types of candles, they are bullish and bearish candles. The bullish candles are represented in green or white colours and the bearish candles are represented in red or black colours. 

Candlestick Nomenclature

 Candlesticks have,

• Body
• Wick / Shadow

In the above bullish candle you can see that the closing price is above the opening price.

Here, in the bearish candle the closing price is below the opening price. So, from this we can understand that the closing price decides whether the candle is bullish or bearish. 

Different time frames can be set while using candlesticks. For example, if "1 Day" time frame is selected, the opening and closing price will be the opening and closing price of the day and a candle represents a day. If "1 Month" time frame is selected, the opening and closing price will be the opening and closing price of the month and a candle represents a month.

Drop your comments and doubts in the comment section below.

Upcoming topics,

• Candlestick patterns
• Support and Resistance