Posted by forex at 3:30 AM
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Understand Line and Axis types
1. Record the closing price for a series of time periods (usually days). Connecting the closing-price points forms the linear representation of chart value. For example, a security that closed at $3 on Day 1 and $4 on Day 2 would connect the points (1,3) and (2,4) on an x,y-graph symbolizing (x = days, y = price).
2. Note the opening and closing price for the day--these form the length of a bar or 'candle' in trading graphs. Often there will be lines sticking out from the top and bottom of the bar, forming the characteristic Japanese Candlestick. The y-values of the line endpoints are the highest and lowest price reached during that day. If the highest/lowest price is the same as the opening/closing prices, the cylindrical bar has no lines (candle wicks).
3. Observe if the y-axis refers to percent or dollar values. Going with our example, starting at Day 1, stock XYZ registers a 0 percent on a percent-change graph since the identical price of $3 (or any price value) on Day 1 is obviously not going to change. At the end of Day 2, XYZ is worth $4 per share. On a y = price axis, the change would be by +1 (4-3), while on a percent change, it would be 1/starting price x 100 percent = 1/3 x 100 percent = 33 percent.
Indicators - SMAs and Bollinger Bands
4. Calculate the average of closing prices for the last x trading days, where x is usually between 10 and 100. In conjunction with other chart indicators such a Bollinger Bands, simple moving averages (SMAs) can give substantial insight into future price movements.
5. Designate a time period for the SMA. This can be tricky. A larger x gives a smoother value and more definite increase/decrease signals. This is good, but so many numbers may blunt a recent upswing or downswing that may yield big profits or losses in a short time. By contrast, a smaller x will capture such recent swings since the most recent day is a bigger portion in the overall average. The downside to a small number of days in the SMA is that fluctuations that do not indicate a consistent trend can give false signals about future stock price movement.
6. Activate Bollinger Bands if the feature is available. You will be asked for a time period and standard deviation number. Stay with 10 days SMA and two standard deviations.
7. Notice if XYZ price is 'touching' an upper Bollinger Band; it means the security is overpriced judging by closing prices of the last 10 days. Price will likely come down within several days, if the past 10 days are indicative of a consistent trend. Similarly, an underpriced stock will be at or very close to the bottom Bollinger Band, indicating it is likely (but never certain) to rise within a few days.