Technical Analysis

Celticheart Investor

A beginner's guide to trading and investing

As I mentioned in my last blog technical analysis is the name  given to a whole host of analytical tools that can be used to examine and identify buying and selling trends in a company's share.


We do not appreciate just how lucky we are, having so many tools available to us on line, often free of charge. Although these tools lend themselves best to traders who are looking to buy and sell shares on a relatively short term basis 
it is my view that there is also a lot of valuable information that can be learned by the mid to long term investor too.

The logical place to start looking at these tools is with charts, these can be linear or candlestick depending on your preference. For me the candlestick charts are infinitely easier to interpret which is why I lean towards them.

Before I go any further I would like to stress that I am not an expert in charting, simply an enthusiastic user of charts who is, as they say, "learning as I go".

My intention with, what will be through necessity, a series of blogs, is to show you the tools that are available to you, explain what it is they are capable of showing and point you in the right direction to get more in depth tuition.

Hopefully, by taking this approach I too will learn through the process, to start with I would like to give you an overview on candlestick charts.

Candlestick Charts

The origin of these charts goes back to the 17th century, in contrast similar charts did not appear in the United States until the 19th century. They were originally used in the trading of rice, the most important commodity in Japan 
at the time but ultimately became used in establishing trading patterns for Gold, Silver and other commodities.

Strangely enough, the main factor that these charts track is not profit or loss but simply market sentiment or emotional responses to the markets.

Amazingly the Western world did not really embrace these "Candlestick" charts until the 1980's when the spread of PCs really started to take off and made access to information so much more readily available.

The principles of Candlestick charts are pretty much the same as bar charts 
and are relatively simple to understand. Every bar has 3 key elements, the real body (solid or open), the top shadow / wick and the bottom shadow / wick. 

Increments can be set as minutes, hours, days or months but for now we will just look at them on a daily basis.


The real body represents the bulk of the day's trading with the top shadow being the highest price of the day and   the bottom shadow representing the lowest price.

If the day closes up on the day's opening share price then the body will be open, but if the sp closes down the body will be solid. These days the bars are frequently shown as red (down) and green or blue (up) but the principle is the same.

The next thing to understand is the size of the body which represents volume   of trades, in a way the colour of the bar tells us less than the size of the bar because if the bar is very small it shows that there was no real dominance between buys and sells and if the bar is replaced by a single line (A Doji) this shows complete indecision in the market which can indicate a change of direction.


Doji comes in several types, including, 3rd from left,
the distinctive "Dragonfly Doji" and 4th from left, the Gravestone Doji"

We will deal with the significance of each of these doji in future blogs but for now will leave you with  a word of advice, don't get emotionally attached to doji, they are fickle little creatures at the best of times.
 

There are many books around about Candlestick charting but for me one of the best books I have found which will give you an, easy to understand, introduction to charting is "Candlestick Charts by Clive Lambert.

http://www.amazon.co.uk/Candlestick-Charts-introduction-candlestick-charts/dp/1905641745/ref=sr_1_1?ie=UTF8&qid=1352029161&sr=8-1 

Next time:  Recognising patterns

A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.