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Technicals Reflecting Market Trends

Prakash Priyadarshi

In financial market, knowledge is power. Using the understanding of market movement to predict future movement is key to make smart money in market. Even the basic understanding of technical trends could generate profits for you.

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Stock market is known for its unpredictable approach and pace. It surprises investors again and again through its ups and downs. It’s not easy to know the direction of the market. Usually market decides it’s direction in three formats – bull market, bear market and range bound market. For an investor trying to make money in market, it is important to understand the market trends and moves. Technique, figures, charts, movement, lines, signs etc. are important tool which help in understanding the market. In this story, we will try to inform you about the technicals which reflect the investors sentiments and provide fair bit of prediction about the future market trends.
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Trend and trend line
When we explain the analysis of share on the basis of its performance and pace, trend plays an important role. Every share in the market doesn’t moves in one direction. The direction made during the upward and downward movement of share is called trend. It is important for any person involved in share market that he or she should identify the trend. The benefit of indentifying the trend is that you will able to trade as per the movement of the trend because going with the trend will only help you in reaping benefit out of stock market.
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To draw the upward trend line of any share movement, a line joining the lower level of that share for that particular period is drawn. This will help the investors to understand that how much the particular share will go down and then will start moving upwards again. We often talk about bull market and bear market. Actually these both show the long term trend. Market, in any bull or bear market, doesn’t moves on straight direction. In any bull market there are many big and small medium term trend can be witnessed whose direction is towards downward.
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Any share is said to be in down trend when its complete movement is towards down. It can be recognized if the new peak is lower than the previous peak whereas every bottom is lower than its previous bottom. Recognizing the downtrend of any share is as important as recognizing the uptrend. The foremost advantage of recognizing the downtrend is that investor can sell his share before downtrend. As per the technique to draw the downtrend line of any share movement, a line joining the upper level of that share for that particular period is drawn. This is will help investors in knowing that how much that particular share will go up and then will start falling.
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Chart pattern
A chart pattern of a share is the structure which indicates the move of stock in coming days. Technical analysts use chart patterns to know the current trends and changes in current trends or continuity. The whole concept of chart pattern depends on the basis that history repeats itself. Technical analysts believe that one pattern can be seen again and again in the movement of any share and whenever it happens the possibility of movement of share in one direction increases. On the basis of historical trend of the chart pattern, technical analysts try to explore business opportunities in that particular stock. In technical analysis there are two types of patterns – Reversal and Continuation. Reversal pattern is an indication that the trend will change the pattern after completion. On the other continuation pattern indicates that even after completion the pattern will remain same.
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Head & Shoulders
This is a reversal chart pattern and when chart of any share shows this pattern that indicates that the movement of this share will be opposite to the previous trend. In all type of head & shoulders pattern there are four main parts – one neckline, one head, and two shoulders. You can see the chart 1 where reversal of downward trend is indicated in a head & shoulders pattern. In fact, head & shoulder chart pattern is the situation prior to the reversal of current trend of any stock and is quite helpful for technical analysts.
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Double tops and double bottoms
This pattern is also a trend reversal chart pattern and this also indicates that the share will move in opposite direction of the previous trend. This pattern is formed after strong trend of any share (be it upwards or downwards) and gives the indication to the technical analysts that time has come when the current trend will be reversed. This pattern is formed when any stock tries to test its support level twice but support doesn’t breaks. This pattern is also formed when the stock tries to test its resistance level twice but it does not succeed in breaking the resistance and moving up. We can see in chart 2 that share tried to cross the resistance level twice but it didn’t succeed (this is double top situation). After this the upward trend of the stock ended and it went to the downward trend. If we again the chart 2 then it is learned that it tried to went downwards twice and met the support level and it went upwards.
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Triple tops and triple bottoms
Triple tops pattern is formed when any share tries to test its resistance level thrice but is not able to break it. This indicates that the trend of boom in stock market is going to end. The problem with triple tops and triple bottoms is that it can create an illusion. When any stock tries to test the resistance level or support level then double tops and double bottoms is formed. In such situation technical analysts reach to the conclusion that trend reversal of that stock will happen, before the triple tops and triple bottoms is formed.
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Moving averages
Moving average informs the technical analyst about the uptrend and down trend of the stock. This shows the direction of moving average of the share. If moving average of any share is going upwards and its price is above the moving average then on that basis we can say that share is in uptrend. Other than this if any share’s short term moving average is more than the long term moving average then it indicates that the share is in uptrend and if the any share’s long term moving average is more than the short term moving average then it indicates that the share is in downtrend.
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Simple moving average
It is the easiest way to calculate the average share price. In this the closing price of that particular share of all days of a particular period is added and is divided by the number of days. To understand that any trend will continue or will reverse the best way is to increase the number of days. Although the utility of this average is limited because the conclusion achieved from this is equal at all points, the sequence of the share doesn’t matters (whether it is two days old or fifteen days old).

 

 

 

Prakash Priyadarshi

priyadrshi.prakash@gmail.com

(The writer is a TV Journalist)