Technical Analysis Terms
Here is a list of common terms associated with reading stock charts:
Bar Chart: A popular way to display and analyze financial price information in graphical form. The horizontal axis of a bar chart represents the passage of time with the most recent time periods on the right side while the vertical axis represents the stock’s price.
Bollinger Bands: An indicator that allows users to compare volatility and relative price levels over a period of time. It consists of three bands designed to encompass the majority of a security’s price action. Prices will often meet resistance at the upper band and support at the lower band.
Breakout: Price of a security emerging from a previous trading pattern. The new price “breaks out” above the high (or below the low) trading pattern lines that enclose all other prices for that security in the preceding period. Breakouts are used by technical analysts to predict substantial upside or downside movement.
Buy Signal: A condition that indicates a good time to buy a stock. The exact circumstances of the signal will be determined by the indicator that an analyst is using. For example, it’s considered a buy signal when the MACD crosses above its signal line.
Candlestick Chart: A form of Japanese charting that has become popular in the West. A narrow line (shadow) shows the day’s price range. A wider body marks the area between the open and the close. If the close is above the open, the body is white (not filled); if the close is below the open, the body is black (filled).
Channel: When prices trend between two parallel trendlines, this is referred to as a channel.
Channel Line: A straight line drawn parallel to the basic trendline. In an uptrend, the channel line slants up to the right and is drawn above rally peaks; in a downtrend, the channel line is drawn below price troughs and slants down to the right. Prices often meet resistance at rising channel lines and support at falling channel lines.
Correction: After an advance, a decline that does not penetrate the low from which the advance began is known as a correction. Also referred to as a retracement, a correction usually retraces 1/3 to 2/3 of the previous advance
Divergence: A situation that occurs when two lines on a chart move in opposite directions vertically. People often look for divergences by comparing a stock’s direction to the direction of its RSI, its MACD or its Stochastic Oscillator. There are two kinds of divergences: positive and negative. A positive divergence occurs when the indicator moves higher while the stock is declining. A negative divergence occurs when the indicator moves lower while the stock is rising.
Doji: A candlestick with a body so small that the open and close prices are equal. A Doji occurs when the open and close for that day are the same, or very close to being the same.
Fibonacci Numbers: The Fibonacci number sequence (1,2,3,5,8,13,21,34,55,89,144,…) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next number is 61.8 percent, which is a popular Fibonacci retracement number. The inverse of 61.8 percent is 38.2 percent, also used as a Fibonacci retracement number. It is the ratio of the Fibonacci sequence that is important and valuable, not the actual numbers in the sequence
Gap: Gaps form when opening price movements create a blank spot on the chart. This occurs when the high of the day is below the low of the previous day or when the low of the day is above the high of the previous day. Gaps are especially significant when accompanied by an increase in volume.
Indicator: A value, usually derived from a stock’s price or volume, that an investor can use to try to anticipate future price movements. Indicators are divided into two groups: trend following or lagging and momentum or leading. Lagging indicators tell you what prices are doing now, or in the recent past, so they are useful when stocks are trending. A moving average is an example of a lagging indicator. Leading indicators are designed to anticipate future price action and many come in the form of oscillators. RSI is an example of a momentum indicator.
Line Chart: Price charts that connect the closing prices of a given market over a span of time that form a curving line on the chart. This type of chart is most useful with overlay or comparison charts that are commonly employed in intermarket analysis. It is also used for visual trend analysis of open end mutual funds
MACD (Moving Average Convergence/Divergence): An indicator developed by Gerald Appel that is calculated by subtracting the 26-period exponential moving average of a given security from its 12-period exponential moving average. By comparing moving averages, MACD displays trend following characteristics, and by plotting the difference of the moving averages as an oscillator, MACD displays momentum characteristics.
Moving Average (MA): An average of data for a certain number of time periods. It “moves” because for each calculation, we use the latest x number of time periods’ data. By definition, a moving average lags the market. An exponentially smoothed moving average (EMA) gives greater weight to the more recent data, in an attempt to reduce the lag.
Resistance: Resistance is a price level at which there is a large enough supply of a stock available to cause a halt in an upward trend and turn the trend down. Resistance levels indicate the price at which most investors feel that prices will move lower.
Retracement: A decline that retraces a portion of a previous advance, or an advance that retraces a portion of a previous decline. Retracements typically cover 1/3 to 2/3 of the previous move, and a retracement of more than 2/3 typically signals a trend reversal
Stochastic Oscillator: A momentum indicator developed by George Lane that measures the price of a security relative to the high/low range over a set period of time. The indicator oscillates between 0 and 100, with readings below 20 considered oversold and readings above 80 considered overbought. A 14-period Stochastic Oscillator reading of 30 would indicate that the current price was 30% above the lowest low of the last 14 days and 70% below the highest high. The Stochastic Oscillator can be used like any other oscillator by looking for overbought/oversold readings, positive/negative divergences and centerline crossovers.
Support: A price level at which there is sufficient demand for a stock to cause a halt in an downward trend and turn the trend up. Support levels indicate the price at which most investors feel that prices will move higher.
Technical Analysis: The study of market action, usually with price charts, which includes volume and open interest patterns. Also called chart analysis, market analysis, and more recently, visual analysis.
Trend: Refers to the direction of prices. Rising peaks and troughs constitute an uptrend; falling peaks and troughs constitute a downtrend. A trading range is characterized by horizontal peaks and troughs. Trends are generally classified into major (longer than a year), intermediate (one to six months), or minor (less than a month).
Trendlines: Straight lines drawn on a chart below reaction lows (in an uptrend) or above rally peaks (in a downtrend) that determine the steepness of the current trend. The breaking of a trendline usually signals a trend reversal.
Volatility: A measurement of change in price over a given period. It is usually expressed as a percentage and computed as the annualized standard deviation of the percentage change in daily price. The more volatile a stock or market, the more money an investor can gain (or lose!) in a short time.