Several technical tools are used in traders’ day-to-day activities, especially Asian Stock Exchanges. These include trend lines, moving averages,technical oscillators and Fibonacci levels. The article below will provide a brief introduction to these analysis methods and their uses.
Trend Line Analysis
A trend line is a two-dimensional tool that attempts to show the general direction of a share’s performance by plotting high, low and closing prices over a set period. To create a trend line, at least three points need to be plotted on a chart – highs or lows may be used as the first point depending on which way you want to develop your trend (i.e. up or down).
The second point is then placed above or below the first depending on which way you want to draw your trend line, and the third is plotted in the same manner as the second. A fourth point may be added by extending a straight line from this third point through the first – now, you have drawn an upward trend line if prices were rising or a downward trend line if prices were falling.
Generally, traders will notice the upper end of the price movement when drawing trend lines. This can vary significantly due to large purchases or sales pushing prices up/down for that day. Looking at the lower end of price action makes it possible to know where support exists within a current trend. It is important to note that a trend line should not be seen as the only indicator of potential future price movement – it is just one tool in many.
Moving Averages
A moving average is another technical analysis method that predicts share performance by showing the average price over a set time frame. Moving averages are used to smooth out short-term fluctuations and highlight long-term trends. There are two types of moving averages: exponential and straightforward.
The simple moving average adds up all prices for a given period, divides this total by the number of prices being analysed, then plots the results on a graph with the most recent closing price subtracted from each calculation. The length of time over which you calculate your SMA will depend on the time required to conclude whether prices are high or low. Generally, we look for shares with longer moving averages because it gives us more data points and, therefore, a clearer indication of whether we should buy or sell.
An example of SMA
The exponential moving average builds upon the simple moving average by weighting each price based on its size. This means that older data gets less significance than newer data which helps prevent older data from skewing the result. As such, EMA’s react faster than SMAs, although both will produce similar results after a certain number of days (52 for weekly/monthly/quarterly periods; 26 for daily ones). For this reason, we tend to use SMAs for long-term analysis and EMA’s for short-term.
Confirmation Indicators
Confirmation indicators help traders confirm their decisions by identifying entry points for buying/selling shares. Two examples of confirmation indicators are On Balance Volume (OBV) and William %R. OBV measures whether money flow into or out of the market is higher than previous values, plotting this movement as an indicator known as ‘trend volume’.
Other Indicators
Several other technical indicators can help traders predict how share prices may move in future. These include:
Moving Average Convergence Divergence (MACD)
Measures bullish/bearish momentum by plotting the difference between a 12-period and 26-period SMA.
Stochastics Oscillator
Measures the speed and change in price movements based on closing prices over a set time frame (14 days).
Relative Strength Index (RSI)
Measures whether shares are potentially overbought/oversold based on closing prices over a set time frame (14 days).
Bottom Line
These tools can help traders form their technical trading strategies to buy and sell Asian stocks, but it is essential to understand how they work before building a strategy. Before investing real money, beginner traders are advised to use an experienced and reputable online Saxo forex broker.
