What is Technical Analysis in Stocks | How to do it like a Pro?

Before choosing a stock to buy, fundamental & technical analysis is very important.

Technical Analysis refers to identifying the right time to buy a stock.

 It is useful to decide buy or sell a stock by analyzing certain candlestick patterns and techniques.

 A lot of us have heard the phrase ” History Repeats Itself“. Well, the same is applicable to stocks.

Whatever patterns the stock has shown in the past. Ideally, a similar pattern will be shown in the future.

 Now, you must be thinking about How to identify these patterns?

 Well before we get to that we need to get a basic understanding of a trend.

What is a trend?

When all the prices of a stock are plotted on a graph. They move in a general direction which is known as a trend.

 Trends are basically of 3 types :

• Upward Trend – Higher highs and higher lows.
• Downward Trend – Lower highs and lower lows.
• Sideways Trend – Highs and lows are generally in the same range.

An investor should be able to identify if the stock is in an uptrend, downtrend or side trend.

A good knowledge of trends can help the investor in differentiating between a bearish and bullish candlestick pattern.

What is a Candlestick?

 A candlestick is a candle that displays the Open, High, Low and Closing price of a stock in a particular time frame.

Types of Candles

There are various types of candles that help in generating a buy or sell call. However, the most popular patterns that can be used to predict the movement of a stock are listed below.

Candlestick patterns can be divided into bearish and bullish patterns.

Bullish Candlestick pattern

Bullish candlestick patterns help in generating a buy call for stocks and are most powerful in a downtrend. 

1. Bullish Engulfing Candlestick :

• A bullish engulfing candlestick can be spotted when the body of the second candle completely engulfs the previous day’s candle.
• Both the tails of the previous day’s candle are covered by the bullish candle.
• Such a pattern is most powerful if formed at the bottom of the downtrend.

 2. Morning Star Candlestick :

• A morning star is a three candlestick pattern.
• The first candle is a big bearish candle followed by a small Doji candle. 
• The third candle is a big bullish candle closing near the top of the day.
• Such a pattern is most powerful if formed at the bottom of the downtrend.

3. Hammer Candlestick :

• A hammer candlestick is formed when the open, high, and closing prices of the candle are roughly the same.
• The shadow of the candlestick should be at least twice the size of the body.
• The color of the candle is green.
• Such a pattern is most powerful if formed at the bottom of the downtrend.

Bearish Candlestick pattern

Bullish candlestick patterns help in generating a sell call for stocks and are most powerful in an uptrend.

 1. Bearish Engulfing Candlestick :

• A bearish engulfing candlestick can be spotted when the body of the second candle completely engulfs the previous day’s candle.
• Both the tails of the previous day’s candle are covered by the bearish candle.
• Such a pattern is most powerful if formed at the top of the uptrend.

2. Evening – Star Candlestick :

• An Evening – Star is a three candlestick pattern.
• The first candle is a big bullish candle followed by a small Doji candle.
• The third candle is a big bearish candle that closes near the bottom of the day.
• Such a pattern is most powerful if formed at the top of an uptrend.

3. Hanging Man Candlestick :

• A Hanging Man candlestick is formed when the open, high, and closing prices of the candle are roughly the same.
• The shadow of the candlestick should be at least twice the size of the body.
• The color of the candle is red.
• Such a pattern is most powerful if formed at the top of the downtrend.

An investor can choose the right time to buy or sell a stock with the help of these patterns. However, the stock market is volatile in nature. An investor can only predict the movement of the stock but cannot be 100% correct on every trade.