This article presents some important technical analysis stock market trading concepts. Technical tools help investors predict share prices and forecast conditions in the stock market.
Fibonacci Retracement
The key Fibonacci ratios in technical analysis are 23.6%, 38.2%, 50%, 61.8%, and 100%. A Fibonacci retracement is created by taking two extreme points on a stock chart and dividing the vertical separation by the Fibonacci ratios.
Furthermore, the extreme points are usually major peaks and troughs. By drawing horizontal lines between those points, the investor identifies potential support and resistance levels. Additionally, it’s fascinating to know the Fibonacci ratio, which is found everywhere in nature, provides a discernible pattern in the ‘artificial’ stock market.
Moving Average Convergence/Divergence (MACD)
MACD can help identify the relationship between two price moving averages. It is a trend-following momentum indicator. Furthermore, the MACD indicates momentum, direction, strength, and duration of a trend in a stock’s price. A signal line is the nine-day exponential moving average of the MACD. It functions as a buying and selling signal.
Additionally, traders watch for a move above or below the zero line. It assists them to determine the position of the short-term average relative to the long-term average. The short-term mean is above the long-term average in the event of the MACD being above zero. Moreover, this signifies an upward momentum trend.
Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a momentum indicator which computes the magnitude of recent price fluctuations to analyze oversold and overbought conditions. The formula for computing the RSI is:
RSI = 100 – 100 / (1 + S)
where S is the mean loss of down periods or the average gain of up periods.
Experts plot the RSI on a scale of 0-100. Furthermore, to calculate the RSI, you must take into account a period of 14 days.
With an RSI over 70, experts consider a stock “overbought”. Whereas, if the calculated RSI equals less than 30, they regard the stock “oversold”.
In conclusion, investors must carefully consider market conditions and the various parameters such as Fibonacci retracement, Relative Strength Index (RSI) and the Moving Average Convergence/Divergence (MACD) when making investment decisions.