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This wiki is in relation to the repo mentioned https://github.com/saradindusengupta/stock-market_forecasting_using-technical_indicators This wiki covers the basic of each indicator and the related code is available at the repository.
Here are two primary methods used to analyze securities and make investment decisions: fundamental analysis and technical analysis. Fundamental analysis involves analyzing a company’s financial statements to determine the fair value of the business, while technical analysis assumes that a security’s price already reflects all publicly-available information and instead focuses on the statistical analysis of price movements.
Technical analysis may appear complicated on the surface, but it boils down to an analysis of supply and demand in the market to determine where the price trend is headed. In other words, technical analysis attempts to understand the market sentiment behind price trends rather than analyzing a security’s fundamental attributes. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor over the long-term.
Technical analysis is a method of evaluating securities that involve a statistical analysis of market activity, such as price and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but rather, use charts and other tools to identify patterns that can be used as a basis for investment decisions.
There are many different forms of technical analysis: Some rely on chart patterns, others use technical indicators and oscillators, and most use a combination of techniques. In any case, technical analysts’ exclusive use of historical price and volume data is what separates them from their fundamental counterparts. Unlike fundamental analysts, technical analysts don’t concern themselves with a stock’s valuation – the only thing that matters are past trading data and what information the data might provide about future price movements.
- The market discounts everything.
- Price moves in trends.
- History tends to repeat itself.
Many experts criticize technical analysis because it only considers price movements and ignores fundamental factors. The counterargument is based on the Efficient Market Hypothesis, which states that a stock’s price already reflects everything that has or could affect a company – including fundamental factors. Technical analysts believe that everything from a company’s fundamentals to broad market factors to market psychology is already priced into the stock. This removes the need to consider the factors separately before making an investment decision. The only thing remaining is the analysis of price movements, which technical analysts view as the product of supply and demand for a particular stock in the market.
Technical analysts believe that prices move in short-, medium-, and long-term trend. In other words, a stock price is more likely to continue a past trend than move erratically. Most technical trading strategies are based on this assumption.
Technical analysts believe that history tends to repeat itself. The repetitive nature of price movements is often attributed to market psychology, which tends to be very predictable based on emotions like fear or excitement. Technical analysis uses chart patterns to analyze these emotions and subsequent market movements to understand trends. While many forms of technical analysis have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.
Technical analysis can be used on any security with historical trading data. This includes stocks, futures, commodities, fixed-income, currencies, and other securities. In this tutorial, we’ll usually analyze stocks in our examples, but keep in mind that these concepts can be applied to any type of security. In fact, technical analysis is far more prevalent in commodities and forex markets where traders focus on short-term price movements. Now that you understand the philosophy behind technical analysis, we’ll get into explaining how it really works. One of the best ways to understand what technical analysis is (and is not) is to compare it to fundamental analysis. We’ll do this in the next section.
Trends aren’t always easy to spot because prices almost never move in straight lines. Rather, prices tend to move in a series of highs and lows over time. In technical analysis, it is the overall direction of these highs and lows that constitute a trend. An uptrend is classified as a series of higher highs and higher lows, while a downtrend consists of lower lows and lower highs.
Above is an example of an uptrend. Each of the high points of the trend – 2, 4, and 6 – are higher than the previous high, while each of the low points of the trend – 3 and 5 – are higher than the previous low. For the uptrend to continue, the next low point must be above 5 and the next high point must be above 6, else the trend will be deemed a reversal.
There are three types of trends:
- Uptrend
- Downtrend
- Sideways / Horizontal Trends
Sideways or horizontal trends occur when there is little movement up or down in the peaks and troughs of a trend. If you want to get technical, you might even say that a sideways trend is actually the absence of any well-defined trend in either direction. (For more insight, see Peak-And-Trough Analysis).
In addition to their direction, trends can be classified in terms of their length. Most traders consider trends short-term, intermediate-term, or long-term. Long-term trends occur over a timeframe of longer than one year; intermediate-term trends occur over one to three months; and, short-term trends occur over less than one month.
Trends are also embedded within one another. For example, Figure 1 above is an example of a long-term five-year trend and Figure 2 is a two-month subset of that trend. In other words, long-term trends consist of a series of intermediate-term trends which consist of a series of short-term trends. Long-term uptrends may have several short- and intermediate-term downtrends along the way.
A trendline is a simple charting technique whereby a line is added to a chart to represent the trend in a market or stock. Drawing a trendline is as simple as drawing a straight line that connects lower lows or higher highs to show the general trend direction. These lines are used to cut through the noise and show where the price is headed, as well as identify areas of support and resistance. Support levels are where the price rebounds higher multiple times, whereas resistance levels are where prices rebound lower multiple times. The strength of support and resistance levels are determined by the number of rebounds from the trendline.
A channel consists of two trendlines that act as strong areas of support and resistance with the price bouncing around between them. The upper trendline consists of a series of highs, while the lower trendline consists of a series of lows. A channel can slope upward, downward, or sideways, but regardless of the direction, the interpretation is always the same. Traders expect the price to trade between the support and resistance trendlines until it breaks out beyond one of the two levels, in which case traders can expect a sharp move in the direction of the breakout. Along with clearly displaying the trend, channels are used to illustrate important areas of support and resistance for the stock price.
It is important to identify and understand trends so that you can trade with rather than against them. Two important sayings in technical analysis are “the trend is your friend” and “don’t buck the trend”, illustrating how important trend analysis is for technical traders.