Before formally plunging in the charting used in stock market technical analysis, we must know about some jargons which will frequently be used in learning about shapes and patterns of charts. Following is the list of some primarily basic concepts about charting given by John Murphy.
Primary Areas of Charting:
Charts in stock market technical analysis are a tool to monitor the market trends. There are two primary areas of charting:
- Monitoring the current market’s trends
- Figuring out the most probable trends which are likely to persist
The basic reason of chart analysis is to analyzing the market trends in order to make rational decisions according to the requirement. In other words, it gives a direction to make abnormal returns by reading and forecasting the market. However chart analysis is not a rule of thumb, but experience says that the trends are closer to actual happenings.
Trends generally contain several peaks and trough. There are two main trends as follows:
– Uptrend: It is characterized by a mounting channel of peaks and troughs.
– Downtrend: Down trend expands as a downward series of descending peaks and troughs.
There are three categories of charting trends according to the time period as follows:
- Major trend: any major trend lasts for a year or even more. Long term investors are a target audience to read and understand these trends.
- Secondary trend: its duration is usually from one to three months.
- Minor trend: It is a speculative sort of trend. It may last for a couple of week maximum. It can even be resolved in a day or less. Speculators usually are benefitted of these trends.
Above three categories of trends have several signals that let the stock trader know about the varying trends in stock market. However stock trader needs an extensive experience to start conversation with trend lines.