Charts in Online Stock Trading

Online Trading Made Easy - The Importance of Charts in Online Stock Trading

When trading stocks there are basically two strategies you can use to decide which stocks or indices to trade. Fundamental analysis and technical analysis.

In fundamental analysis, as the name implies, you study the fundamentals of a company (i.e. company accounts and trading reports, competition etc...) to decide whether it is in good shape or not and whether its share price is unvervalued and should be higher. This is what Warren Buffett does, and he is very good at it. But it takes a lot of knowledge and work and also belief that the company accounts and trading reports etc... are accurate and believable.

The other strategy is so-called technical analysis. In technical analysis you don't need to know anything about the company or the index you just study the share price over time, and various technical indicators, such as moving averages.

Technical analysis does require some knowledge but this is knowledge you can gain quite easily from reading websites and books. Technical analysts say that all the news is already in the charts so studying the charts is all you need to do.
Stock charts are a reflection of price movements over time and the volumes of stocks traded.

Technical analysis is based on the following assumptions - prices are determined by supply and demand, supply and demand is a result of both rational and irrational behaviors, prices move in trends and these trends are generally long-lasting, changes in supply and demand can be spotted by analyzing the way the stock price behaves.

Why use technical analysis?
It is easier than fundamental analysis and faster. It does not make us of company accounts and therefore cannot be manipulated by companies, it tells you what to buy and sell and when. Technical analysis based on the behavior of crowds, if people expect a certain thing to happen upon a certain signal, then they will react in a particular way when they see that signal. If enough people react in the same way then the expected outcome is achieved and the analysis becomes self-fulfilling i.e. a stock price goes up because enough people buy the stock because they expected it to go up. Many hundreds of expert analysts use technical analysis and thus influence stock prices by reacting to the same signals.

There are many indicators that are used in technical analysis, but one of the principal indicators is the 200 day moving average. If a stock falls below its 200 day moving average this is considered a bad signal and people tend to sell the stock. If a stock goes above its 200 day moving average this is generally considered a good sign and people tend to buy.

If 80% of stocks in the stock market are above their 200-day moving averages, this is considered to be overbought and so people tend to sell the market. If less than 20% of stocks are above their 200-day moving averages, this is considered to be oversold and a signal to buy.

3 Year Chart of Lloyds with the 200 day moving average in Red - showing how the stock felk sharply once it crossed below its 200 day moving average back in 2007



6 month chart of Lloyds with 200 day moving average in red - the share price is above the moving average which is positive but it could easily fall back below it


There are many other indicators used in technical analysis such as the relative strength index, Bollinger bands etc... and any online stock trading site will allow you to include them automatically on any charts you may wish to look at.

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