Trend Lines
Technical analysis of stocks is based on the fact that prices trend. Some stocks trend in a more definitive way than others and the job of analysts is to find the ones that trend the most. Trend lines are an important facet to technical analysis because they can lead to trend identification and confirmation. The trend line connects two or more price points with a straight line and serves as a line of support and resistance for the stock being
analyzed. Trend lines can have a positive or negative slope depending upon the behavior of the company. These slopes are referred to as up-trending (positive) and down-trending (negative). A stock, or an entire market, is up-trending if it makes higher highs and higher lows and would be considered down-trending if it makes lower highs and lower lows.
These analytic tools can help predict the direction a stock will go depending upon the trending patterns. Although trend lines can be very helpful in a trading system, they can also be used as false signals if used improperly. They are one aspect of technical analysis that we used in our system and helped us scan for trend following stocks.
Indicators
Technical indicators are a part of the all-encompassing term “technical stock
analysis”. This facet is used to examine the past performance of a company so that a future trend or pattern can be predicted. There are indicators for the price, volume, and many more aspects of a stock in order to give the trader signals for buying and selling. An
indicator does not provide a flat out buy or sell signal, as the investor will need to interpret the signs to adapt them to his or her individualized trading system. Indicators can also be applied to general market conditions and can be used to predict how a market will perform short term. They are different from other tools because they do not evaluate any part of the fundamental business itself such as earnings and profit margins.
The key to using technical indicators is to choose those that will fit with the
accepted trading strategy. No indicator is right all the time and this is an important fact for investors to remember. The deal breaker for successful technical analysis of a stock is the investor that can be right more frequently than they are wrong. A disciplined trading approach and set indicators will improve the rate of success; switching indicators in an already successful strategy can be the recipe for failure.
Channels
A price channel is a set of upper and lower trend lines that encompass a steadily moving pattern of a stock. The upper line marks the resistance and the lower line marks the support. The stock will bounce around within this channel and sometimes break through the floor or ceiling, alerting investors of a sudden change in behavior. The slopes of the channel determine if the channel is bearish or bullish. A bullish channel is one that has a positive slope; a channel with a negative slope is considered a bearish channel.
Investors look to buy or sell a stock when it breaks through either the support or
resistance. These strategies are known as “breakthrough strategies”. The dotted centerline in a price channel is the midpoint between the support and resistance and is the neutral area for the channel. These channels can also be used to determine if a stock is overbought or oversold.
Japanese Candlestick Charts
Candlestick charts were first introduced by the Japanese in the 17th century when they began to use technical analysis on their rice trade. Charles Dow ended up adapting this technique in the early 1900’s and applied it to his theory. This type of analysis that was introduced by the Japanese had strict principles that included: all known information is reflected in the price, markets fluctuate, and the actual price may not reflect the
underlying value. This sense that the market was moved and influenced by the emotions of traders was a revolutionary one that served as the backbone for charting. These ideas have been modified and refined into the candlestick charts we see today on platforms such as MetaTrader and TradeStation.
The necessary data set for a candlestick chart includes an open, high, low and close values for the given security. The hollow or filled portion of the candlestick is called the body. The long thin lines on the ends of the candlesticks are referred to sometimes as the
“wicks” and “tails” and encompass the high/low ranges. The body of the candlestick is hollow if the stock closes higher than its opening price and is filled if it closes lower than its opening price with the prices on either ends of the tails. See Figure 1.
Figure 1: Candlestick Formation
http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:introduction_to_candlesticks
Traders often prefer candlestick charts to normal bar charts because they are easier to read and perform further analysis on. Each candlestick holds information on price action and an investor can immediately decipher the relationship between the open and close of the stock. If a group of candlesticks appear filled, then the investor knows there is significant selling pressure and a bearish trend and vice versa if the opposite is seen. These charts are widely used by investors and continue to be modified.
Artificial Intelligence
Investors are now looking to a new concept of artificial intelligence and allowing computers to make investment decisions for them. This breakthrough shows that computers can learn from decisions by being programmed to quickly respond to the decision that has been made. These programmed computers can adapt and learn much faster than humans are able to which is why the shift is being made.
Originally, experts had the thought to strive towards a computer system that can mimic human intelligence. Over the years this theory has been modified to certain applications called AI techniques. These techniques are being used by many major companies such as Facebook and Google for marketing reasons. One major problem that
experts face when programming computers is the type of mistakes that computers make.
Computers don’t have common sense unless humans program them to understand the mistake that is being made. These changes are being made and AI is starting to become more and more effective in investment situations. Many investors and computer scientists believe that the future of trading will be artificial intelligence, but for now we are nowhere near that accomplishment.