When it comes to trading stocks, it's important to understand how to understand the principles of stock market analysis so you can decide which stocks to buy or sell for your portfolio, such as stocks belonging to the S&P 500, which contains some of the most popular stocks in the US from large businesses that trade on both of the US stock market exchanges. Without that knowledge, you could lose thousands of dollars and be totally lost in the system.
What is stock market analysis?
Stock market analysis is the process of investigating and studying data on existing stocks and trying to predict how they will do in the market. This is used by most traders due to the fact that stock prices can change from moment to moment, but they normally have a pattern of either going up or down that can be analyzed and followed. Some investors use what is called a technical analysis. This is mostly used to figure out the possible return the stock will provide its owners. When traders get tips on various stocks it is usually after this sort of analysis.
What can influence stock returns or losses?
Multiple factors go into stock market analysis to see what sort of thing causes the prices to go up or down. Some of these factors include the business' background, the economy, historic trends, or even natural disasters like hurricanes or earthquakes. You can't use a system of stock market analysis over the long term, however, because it doesn't include any information on a business' future potential. But you can use it to keep track of the ups and downs of a particular stock.
How do traders use stock market analysis?
Traders have multiple tools to use when it comes to market analysis. They can use well-developed patterns, or use what is called support and resistance. Support is when they track the level from which lower stock prices are predicted to go up from and resistance is the height the stock is predicted to get to before it may go down in price again. The theory is that most stocks can be predicted to rise or fall after they get to a support or resistance amount.
Other Methods of stock market analysis
Some of the other methods of stock market analysis include:
Charts and Patterns
When it comes to tracking stocks one of the methods is through charts and patterns. A system of bar charts is normally used that represent periods of time (like daily, weekly, etc). The top of this chart for stock market analysis would list the high price while the smaller bar chart to the right lists the opening and the other one lists the closing prices.
Another chart sometimes used is called a candlestick chart. It uses a slightly different system of markings to show the highs and lows and prices of the stock it is following. It also uses a color system, with red or black if the stock's closing cost was lower than the one prior to this one or white and green if it was more.
A particular pattern that is often seen in financial market analysis is known as the Cup and Handle. This is when a stock starts off with a high price and then dips in cost and eventually returns to a higher price. When that stock levels out in costs, it is called the handle of the stock, and this can be a good place to buy so the trader makes good profits when it goes back up, which is the cup part of the pattern.
Head and Shoulders is yet another stock pattern. It means that the stock first comes to a peak (a shoulder), then gets lower and then forms another even higher peak (the head), and then goes up again, (another shoulder).
Moving Average – A very popular stock market analysis tool, this one reveals the stock's median cost within a certain timeframe. It is plotted on a chart so that traders can see what the stock's pattern is.
Relative Strength Index – This stock market analysis tool looks at a comparison of the amount of days a stock ends on a positive note and the amount of days it ends on a negative note. It is used over a specified amount of time, normally nine to 15 days. In order to use it, the traders divide the median amount of days the stock goes up by the median amount of days it goes down. The result is added to one and employed to divide 100. Then you subtract that result from 100 to get the stock's relative strength index. Depending on that amount, a trader can tell if a stock is strong or weak.
Money Flow Index – This process uses the amount of shares that were traded plus the cost of the stock. If this number is high, you should sell your stock, but if it is below 30 you should buy more.
Bollinger Bands – This type of stock market analysis is recorded as a plotted group of three lines. The results are based on how volatile the stock's prices are moving.
All in all, you must use some sort of stock market analysis if you want to be successful in trading on the stock market.