Different technical analysis tools used in Australian stock trading

Technical analysis examines past price movements to identify patterns and predict future price directions. Many different technical analysis tools exist, each with advantages and disadvantages. Some of the most favoured technical analysis tools used in Australian stock trading include moving averages, support and resistance levels, candlestick charting, and Fibonacci retracements.

Moving Averages

A moving average is an indicator that presents the average price over a specified period. Moving averages are used to smooth out price action and can be used to identify trends. There are three main moving averages: simple, exponential, and weighted.

Simple moving averages give equal weight to each data point in the period. At the same time, exponential moving averages place more weight on recent data points. Weighted moving averages assign more importance to recent data than older data.

You can use moving averages to generate buy and sell signals. A buy signal is produced when the short-term moving average crosses above the long-term. A sell signal is produced when the short-term moving average crosses below the long-term moving average.

Support and Resistance Levels

Support and resistance levels show where the market tends to stop and reverse. Support levels form when the market falls, and buyers step in to prevent further losses. Resistance levels form when the market rises, and sellers step in to prevent further gains.

You can identify these levels by looking for price patterns on a chart. Common patterns include double bottoms, head and shoulders, and triple tops. Once a support or resistance level is distinguished, traders will watch for price action at that level to generate buy or sell signals.

Candlestick Charting

Candlestick charting is a type of technical analysis that uses specialised charts to show the buying and selling pressure in security. Candlestick charting is a favoured technical analysis tool traders use.

These charts are easy to interpret and can be used to generate buy and sell signals. A buy signal is generated when the candlestick body is green, and the candlestick wicks are short. A sell signal is generated when the candlestick’s body is red and the candlestick wicks are long.

Fibonacci Retracements

Fibonacci retracements are technical indicators that show support and resistance levels based on Fibonacci ratios. These ratios are obtained from the Fibonacci sequence, a series of numbers where each is the sum of the previous two numbers.

Fibonacci ratios are often used to identify support and resistance levels and generate buy and sell signals. A buy signal is created when the price retraces to a Fibonacci support level and starts to bounce higher. A sell signal is produced when the price retraces to a Fibonacci resistance level and starts to fall.

Relative Strength Index (RSI)

The relative strength index (RSI) measures the driving power of price movements. The RSI is calculated using a formula that compares the average gains of the security to the average losses over a specified period.

The RSI can be used to generate buy and sell signals. A buy signal is generated when the RSI crosses above the 50 levels. However, a sell signal is generated when the RSI crosses below the 50 levels. The RSI can also be used to identify overbought and oversold levels.

Moving Average Convergence Divergence (MACD)

The moving average convergence divergence (MACD) presents the relationship between two moving averages. You can calculate the MACD by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA.

You can use the MACD to produce buy and sell signals. A buy signal is initiated when the MACD line crosses above the signal line. In contrast, sell signals are generated when the MACD line crosses below the signal line. You can also use the MACD to identify overbought and oversold levels.

Bollinger Bands

Bollinger Bands are technical indicators that show the volatility of a security. Bollinger Bands are calculated using a formula that plots two standard deviations above and below a moving average.

You can use Bollinger Bands to produce buy and sell signals. A buy signal is produced when the price breaks out above the upper Bollinger Band. A sell signal is created when the price falls below the Bollinger Band. You can also use Bollinger Bands to identify overbought and oversold levels.

Click here to trade stocks with Saxo Bank.