Chart analysis instruments promise to make the stock market more predictable. But does it work? t-online shows what is behind the strategy and for whom it is worthwhile.
If you don’t just want to rely on your gut feeling on the stock exchange, you will quickly come across the so-called Chart technique. These analysis options, which primarily examine the price trend of a share, promise to make the stock market more predictable.
Chart analysis is controversial among stock market experts. The successful investor Warren Buffet is allegedly not a fan of the method, and stock market legend André Kostolany is said to have thought little of the lines and triangles of the chart technicians.
Nevertheless, the chart analysis is also relevant outside of its fans. Because: On the stock exchange, that is what counts Investment behavior of the masses predict – and many people love rules and analysis to adhere to. For that reason alone it is worth it Basics of chart technique to know and apply. After all, many investors adjust their buy and sell limits to the principles of this method and thus determine the market.
t-online explains to you what chart technology is all about, how the basic principles work and how you as an investor can benefit from them.
What is chart analysis about?
The chart technique is a method to Trends in the stock market to analyze and discover at an early stage. Proponents of the chart technique hope for an advantage in stock trading, for example by selling the stock early at the beginning of a downtrend.
The basic assumption behind the chart technique is a cyclical stock market development. That means: The courses run in regular waves, which can be of different lengths – but always result in similar patterns.
The decisive factor in chart technology is the price trend and, depending on the analyst, also the trading volume. Business indicators such as the Sales or the price / earnings ratio are ignored, however. Political and economic interrelationships, such as economic stimulus programs or sanctions, also have no place in the strict chart analysis. The chart analysis is in stark contrast to the so-called Fundamental analysis, where investors and investors observe the fundamental company metrics.
What methods do I use to identify buy signals?
There are several methods you can use to identify upward and downward trends in the charts.
The 200 day line
The best known is the 200-day line: Here you add the current price with the closing price of the share for the past 199 days and calculate the average closing price. In the coming days, add the closing price of the last day and delete the closing price of the oldest day. So the line continues. This so-called simple moving average helps you as an investor to identify trends.
If the price of the share is above this line, an upward trend is evident. If the share price falls below the 200-day line, according to the chart technique, this indicates a downtrend and you should sell better as an investor. These lines can help you around when you are using Stop losses work on your stocks.
So you can have a stop loss at Breaking the 200-day line adjust downwards. But be careful: you should allow yourself a little more leeway with volatile stocks. Here the stocks can only briefly fall below the line and shortly afterwards experience an upward trend again.
Support and resistance levels
Another important aspect of chart analysis is the Support and resistance levels. These are striking points in the course of the course. A resistance line can be found on the upper course of the course: It is a mark that the course starts again and again, but not breaks through to the top.
The Support line on the other hand is one validation downward. In the past, when prices fell, the share price repeatedly approached the support line, but did not fall below it. If price breaks the support line, it can go further down quickly. Does he break through Resistance line up, it can be one beefy uptrend give – like Bitcoin at the beginning of 2021.
If the resistance line is broken permanently, this forms the new support line. The same principle applies when moving down, then a broken support line is the new resistance line.
The M and W formations
In addition to these aspects, chart analysts also look for patterns in the historical course that could provide information about a trend. The so-called W formation, for a price decline the M formation.
With these double formations it is crucial that the course peaks are on the same course level. If the price breaks the intermediate peak of the M or W after the second “bottom”, chart analysts see a trend reversal.
The Stochastic Oscillator Technical Indicator
If you like it a little more complicated, you can also use the “Stochastic Oscillator Technical Indicator“. This shows you whether a share or a market is overbought – that is, too many people are buying the shares – or is underbought, i.e. the share is running under the radar.
The value of the “Stochastic Oscillator Technical Indicator” is always between 0 and 100. A value over 80 suggests that a Stock overbought so it has run hot and will soon fall. A value from under 20 suggests that a stock is currently receiving too little attention and could increase.
You calculate the value as follows:
(C – L14): (H14 – L14) x 100
C represents the current closing price (current),
L14: the lowest price of the last 14 days and
H14: the highest course price in the last 14 days
The trend channel
If you want to be less mathematical, you can use the Trend channel use. Here you put on a pencil and connect the tips in one line and the course depths with another line. This gives you the trend channel that shows you in which area the course oscillates back and forth. If the lines point down, the current trend is also down. If it is a straight line, the trend is sideways. If it breaks the top line, this indicates an upward trend.
Which unit of time should I use in the chart technique?
So that the various methods give you a reliable result, you should read the course not too fond of detail consider. For example, if you draw a trend channel on an intra-day chart that shows a new candle every 5 minutes, your channel is highly susceptible to the trading behavior of some large players.
This balances out if you choose at least the four-hour view or, if possible, the Day view. This will give you a more representative picture of that Trading behavior of all investors in the share.
How much knowledge about chart technology is necessary as an investor?
The experts argue about this. As mentioned at the beginning, there are well-known investors who do not care about the instruments of chart analysis. So it’s a Fundamental question of trading. Do you prefer to act according to the maxim “The trend is your friend”? Then the chart analysis could help you.
On the other hand, if you have any doubts about the cyclical behavior of the market, you should focus on that Fundamental analysis and tap the company behind the stock for the hard business facts.
One thing is certain: Chart technology does not take place in a vacuum either. Many stock market prices are from economic policy events and suddenly occurring phenomena such as the corona crisis – even if this cannot be foreseen by a pattern in the course.
For many investors, the chart analysis is therefore more of one Addition to your trading setup that they also use, in addition to news, economic and interest rate data.