Stock market technical analysis is the study of stock market data with a variety of techniques, including the use of charts, with the aim of forecasting the probable future movement of stock prices. While there are many tools that can be applied to technical analysis, charts are a mainstay of this area. Likewise, although technical analysis may study other types of data, price movement is most often the primary focus. When applying data such as stock prices to a chart, the intent is usually to identify patterns which signal probable outcomes, like the continuation or reversal of a trend.

What Data Does Stock Market Technical Analysis Examine?

Stock price is the most important type of data used in conducting stock market technical analysis. One of the premises of technical analysis is that the existing price movement data contains all the information needed to predict future price movement.

The second type of data often used in stock market technical analysis is information relating to trading volume. Volume is important in technical analysis, primarily as a confirmation of the insights gained by studying price. If the price trend is supported by strong volume, it gains greater credibility; however, if there is a divergence between a price trend and the accompanying volume, this may be a signal of an imminent reversal.

Noted analyst, John Murphy, states that a third area of importance in technical analysis data is open interest. Open interest refers to the number of existing futures or options contracts which have not yet been exercised, settled or reached expiration. The main insight provided by the level of open interest is liquidity, and when studied in combination with volume it may provide confirmation regarding the probable future of a trend. When the open interest and volume are increasing, this indicates the likelihood of a continuation of the trend. When the volume and open interest are decreasing, this signals that the trend may be nearing its end.

Murphy suggests that sentiment analysis and trading indicators may also be of value in stock market technical analysis, but to a lesser degree than the three primary areas listed above.

Stock Market Technical Analysis Tools - Charts

Charts are very important to technical analysis, and there are three very commonly used types of charts:

  • The line chart is the simplest kind of chart, and depicts a single line formed by connecting a series of points plotted on the chart. Line charts are most frequently used with closing prices over a certain period of time to illustrate price changes.
  • The bar chart allows the charting of a wider amount of price data, namely the opening, closing, high and low prices of the period under scrutiny. The top and bottom of the bar shown on the chart represent the high and low prices respectively. The opening price is depicted by a small horizontal line, known as a tick mark, extending from the bar on its left, and the closing price is shown by a similar tick mark on the right.
  • The candlestick chart also shows the four prices shown on the bar chart but depicts them in a more visually vivid manner. The opening and closing prices are shown by a rectangular shape which is called the ‘real body’ of the candlestick. When the real body is white (or green), the bottom shows the opening price and the top represents the closing price. If the real body is black (or red), the opposite applies, in that the bottom shows the closing price and the opening price is shown by the top. A vertical line usually extends from the top and bottom of the real body of the candlestick. At the top, this is known as the upper shadow and represents the high price for the period. Below the real body is the lower shadow, showing the low price.

    Candlestick analysis is a key component of technical analysis, and candlestick charts can provide a great deal of insight into price movement of stocks by studying the proportions of the candlesticks.

Stock Market Technical Analysis Tools – Indicators

A technical indicator is a result of mathematical calculations based on indications of combinations of price, time and volume. The values obtained are used to forecast probable price changes. It is a series of data points that are derived by applying a formula to the price data of a security. This price data applies to any combination of the open, high, low, or close over a period of time. The price data is entered into the formula and a data point is produced. For more detailed information on technical analysis indicators, read Ian Harvey's article on Technical Analysis Indicators.

In Conclusion

Stock market technical analysis can be very valuable to traders seeking to identify which stocks or options to trade, and when to enter and exit their positions. Using the tools and techniques available can provide insight into the likely future price movement, allowing a trader to make informed trading choices. It is advisable to use various methods of analysis, rather than relying on a single type, and confirmation can be found by studying other aspects of market data in addition to price.