The Stock Market is never in control of a single person or community. The entire market is driven by the people involved in it. It is neither completely based on fundamental analysis nor is it based on Technical analysis. News or any major corporate changes or any policy changes have an impact on the stock only when the volume increases on either side of the bargain. If the buyers tend to increase their internist in a stock then the stock is definitely going to go up regardless of any news. On the other hand if the stock is under panic selling from sellers then no matter how good the news is it will react as per the volume and direction shown by the people trading in that company.
Hence one thing is clear :- the king of the market is volume or in other words demand and supply. More the demand, more the buyers and better gains will occur for that particular share.
Chart Analysis is not at all a layman’s work. It requires a lot of experience and a huge amount of time to understand the ongoing pattern, identify entry and exit points etc. Above all it is more dependent on the confidence of an individual than any other technique. The better decisions you take the better confidence gets built. Now on first basis Chart analysis is somehow related to technical analysis. The reason is there are n number of indicators and formulas that are applied on a company’s stock and this in turn results into a probable action for the stock.
The most important and basic knowledge anyone needs to understand is the support and resistance levels in a chart. Then comes statistical measures and real time indicators to make the judgement better.
Support and Resistance Level
In layman terms Support level is always the lower price and Resistance level is always the upper price. For any Share if it’s trailing at 100 Rs then any point below 100 Rs which is very durable for the script. You can also say that the share is not going down from that price is called support level. It provides support to the share when it falls down.
For a share of Rs 100 any price above 100 Rs is treated as resistance level. In other words the level above the trailing price which stops the share from gaining higher valuation is known as Resistance level. It constantly resists the share’s attempts to gain higher valuation.
If you follow the stock’s chart for any period of time there would be specific levels from where the share is gaining reverse momentum. This pattern of reversal momentum needs to get repeated multiple times in order for getting treated as a level of importance.
Once the same pattern is overlapped, the points become clear and trading or investing becomes easy. These points can be used to place well functioning SL and Take profit points. Thus Support and Resistance levels play a major role in chart representation.
With the help of charts one can easily compare the movements of various stocks with Nifty50, Bank Nifty and Sensex.
Mostly the major stocks with high volume move in reference to Nifty50 or Bank Nifty. For instance stocks such as Reliance, Bajaj brother etc. But the stocks included here are those which don’t fall under the blue chip category. For example Renuka Sugar, Cholafin, etc if they react with market movement, it can be said that the stock represents the market direction. Thus such stocks can be trusted and invested into.
For other reference it is possible to identify that there are common intersection points between the major indices and companies. Thus chart comparison gives a clear overview of where the stock stands and how to predict their valuation in future times.
There are indicators such as oscillators, bollinger bands, moving average, volume etc. which are essential for prediction of stock direction. These indicators can put forward a probability of how many chances there are for stock’s movement in either direction. It has been used in an increasing manner nowadays due to the introduction of Algo trading.
The entire market is currently run by major companies and promoters who use Algorithmic methods of trading. It is a computer based system that enables the entry and exit of trades on the basis of pre-fixed targets and objectives. Thus using such indicators can provide more accuracy to the trading decisions.
Overall Chart analysis is a part of technical analysis itself. However these are the basics that anyone should know before beginning the chart analysis. It is also important to follow chart movements before taking any investing decisions. More detailed information is presented for technical analysis in the below mentioned blogs.