Technical Analysis
This page will show basics of technical analysis and terms we use here at Marketchasers. It will give you a much better understanding of what we are talking about as well as other financial analysts. Enjoy!
Basic Terms to Know:
Call: Direct opposite of a put. Purchasing calls is the same thing as shorting but with a little less risk involved. Shorting gives unlimited risk, while buying calls provides defined risk. A call is the option to sell 100 shares at a certain price at some point in the future. When you purchase calls, you have something called a strike price and options price. The strike price is the amount that put options contract will need to reach before you are considered “in the money”. An example would be say you buy a call into Sally’s Bike Farm. Today is August 1st and the current price is $50 and you decide to purchase a December 60 call with an options price of $2. This means that the options price is multiplied by 100 ($2 X 100 = $200) which gives you the price you must pay for each contract. Options are sold in 100 share increments so for $200 , you just purchased 1 options contracts plus commission depending on your broker. With this, you are trying to reach 60 dollars a share by the third Friday of December, since we decided to purchase the December 60 call. Calls can be sold off any time before the 3rd Friday of December for a profit, depending on how much the stock price is up and what the Delta value is for your option. If you decide not to sell the option by the time the 3rd Friday comes and the share price is not above 60 dollars a share, you just lost your whole $200 investment. If it passes above, you just made a lot. For instance, if the share price went to $62 by the end date, you just pocketed $1000 ($12 increase times the number of shares from your options contract, in this case 100, then subtract your initial cost of $200). If you owned two options contracts for these December calls, you would have just pocketed $2400 on a $400 investment. Quite nice huh?
Candlestick: This is a symbol that represents the high,open,close and low over a certain period of time.
Long: Longing is the act of buying a security (fancy word for stock), that you expect will go up in value. This type of trading is what most people do. An example is people who went long on Coca-Cola in the early 1900′s made a fortune due to the stock price increasing.
MACD:
Moving Average: Moving average is a line that combines the average price of a stock’s closing price over a period time. After each day, the moving average is averaged out with everyday for the previous “X” amount of days, where ‘X” is your moving average period. Let me give you an example to make it a little more clear:
Ex. Lets say for 15 days consecutive, the closing prices were 4-5-6-5-4-3-4-7-8-5-3-6-7-3-5. And to make it more clear lets say this is from Monday, January 1st to Friday, January 21st (it is 21 days because the stock market is only open 5 days a week, so 3 weeks is 15 days of business). Now if I asked you to calculate the 10 day moving average as of January 21st, what would it be? It would be 5.1, because you add up the last 10 days and divide by 10 (4-5-6-5-4-3-4-7-8-5-3-6-7-3-5). Do this for each day and connect the dots. This forms your moving average line.
Put: Direct opposite of a call. Purchasing puts is the same thing as shorting but with a little less risk involved. Shorting gives unlimited risk, while buying puts provides defined risk. A put is the option to sell 100 shares at a certain price at some point in the future. When you purchase puts, you have something called a strike price and options price. The strike price is the amount that put options contract will need to reach before you are considered “in the money”. An example would be say you buy a put into Sally’s Bike Farm. Today is August 1st and the current price is $50 and you decide to purchase a December 40 put with an options price of $2. This means that the options price is multiplied by 100 ($2 X 100 = $200) which is the price you must pay per contract. Options are sold in 100 share increments so for $200 , you just purchased 1 options contracts plus commission depending on your broker. With this, you are trying to reach 40 dollars a share by the third Friday of December, since we decided to purchase the December 40 put. Puts can be sold off any time before the 3rd Friday of December for a profit, depending on how much the stock price is down and what the Delta value is for your option. If you decide not to sell the option by the time the 3rd Friday comes and the share price is not below 40 dollars a share, you just lost your whole $200 investment. If it passes below, you just made a lot. For instance, if the share price went to $38 by the end date, you just pocketed $1000 ($12 drop times the number of shares from your options contract, in this case 100, then subtract your initial cost of $200). If you owned two options contracts for these December puts, you would have just pocketed $2400 on a $400 investment. Quite nice huh?
Resistance Line: A line where the price of the share tends not to go above.
Short: Exact opposite of longing and you are expecting the stock price to go down in value. This type of trading is slightly different though because brokers call it “selling short”. It is called this because you are selling shares you do not have, buying back later and hopefully pocketing the difference. An example would be buying John’s Pencil Company and you decide to short sell 10 shares at $50 per share. This means you borrow 10 shares and sell it to someone who is longing for $500. If the price of the shares drop to 45 and you decide to buy back the shares at 45 for $450, you pocket the difference of $50. Remember, you were “short selling” the stock at $50, and buying back at $45. After the sale, you pocket $5 per share.
Stochastics: Stochastics are a technical indicator that an investor can use to assess a stock’s momentum and can also show if a security is possibly oversold or overbought. A stochastic chart is composed of two lines, the %K line and the %D line. The “K” line compares the stocks price to its trading range while the “D” line is the moving average of the “K” line. If you look on a stochastics chart, the scale ranges from 0-100. If the two lines are in the 0-20 range, this signals that a stock could be oversold and an upward trend could begin soon. If the 2 lines are in the 80-100 range, this signals that a stock could be overbought and a downward trend could begin soon. What we are looking for here is just like in a moving average cross. The “K” line passing over the “D” line in the positive direction indicates a bullish trend while the “K” line passing over the “D” line in the negative direction indicates a bearish signal.
Support Line: A line where the price of the share tends not to pass below.
Volume: Volume is the amount of shares of a companies that exchange hands during a certain period of time, most commonly per day. Volume is a powerful tool for short term investors and can tell us a lot about how a certain company as well as the market as a whole is doing. For instance, when we see higher than average volume for a company and the stock price went down, this means that there was more selling interest that day than buying interest. If we see higher than average volume for a company and the stock price went up, this means that there was more buying interest than selling interest.