Charting and technical analysis are used by some investors to assist in shares decision making. The whole area can get incredibly technical, and this charting tip will explain some of the fundamental basics to you. There are a number of underlying reasons as to why some have great faith in charting. The first is a belief that share prices move along in trends, and these trends can be identified via charting in theory. Secondly, some believe that charting can highlight history repeats itself when it comes to the price of a particular share. And lastly, charting is a reflection of a share price and therefore has already priced in all the information that is known about a particular company.
Now here are some of the basic aspects that fans of charting sometimes look out for:
- Resistance levels: This is the historical price point identified that a share commonly fails to go above.
- Support levels: The opposite to the above. It is a point where a share commonly stops falling in value and rises.
- Double Tops: This is the point in which a share has historically peaked at the same time, multiple times. If a double top is identified, this is often viewed badly because it implied that the share has hit a plateau and potentially the only way is down.
- Double Bottom: After a share price historically falls to roughly the same lows following a brief rise, some charters believe there is proof that a share may bounce back and rise from the previous resistance.
- Moving averages: A moving average can be calculated to truly understand whether a share price is on an upward or downward trend as it takes into account all the historical movement over a particular period. This is a particularly common tool for short-term investors.
Charting uses history as a predictor of the future. Stock markets are incredibly volatile and past performance is by no means a definite indicator of future performance. For example, charting may show that a share may be on an upward trend, but new legislation related to that particular share could bring its potential rise crashing down.