TradingKey -Due to the influence of U.S. tariff policies, the U.S. stock market experienced a significant downturn in March, marking a troubling start to the month. Following President Trump's announcement of tariffs on Canada and Mexico, the S&P 500 index faced its worst day of the year on Monday, plummeting by 1.76%. On Tuesday, the index briefly dropped by 2% during intraday trading, nearing the 200-day moving average, before ultimately closing down by 1.22%. Since President Trump took office in January, technology stocks have declined by over 7%, fueled by new trade measures that have escalated fears of a trade war, intensifying risk aversion across Wall Street.

For retail investors seeking to achieve consistent profits in the stock market, a multifaceted approach that combines various strategies and disciplines is essential. This involves not only a long-term investment mindset but also a diversified investment strategy, thorough research and analysis, effective risk management, and regular portfolio reviews. This article aims to thoroughly explore the framework of stock technical analysis, providing a solid foundation for retail investors to gradually master the intricacies of technical analysis from the ground up.

Types of Charts

Candlestick Chart

Also known as the candle chart, it originated in Japan's Tokugawa Shogunate era to record rice market conditions. Today, it's widely used in the global stock market. The chart displays stock price changes within a period based on four key prices: opening, closing, high, and low.

Each candlestick has a body and wicks. A higher closing than opening price makes it a bullish (red/hollow) candlestick, signaling bullish strength. A lower closing indicates a bearish (green/solid) candlestick, showing bearish dominance.

The body length indicates the price gap between the open and close, reflecting the bull-bear struggle.

The upper wick is a thin line extending upward from the body, representing the difference between the daily high price and the closing price (for bullish candlesticks) or the opening price (for bearish candlesticks), showing the resistance the stock price encountered during upward movement. The lower wick is a thin line extending downward from the body, representing the difference between the daily low price and the opening price (for bullish candlesticks) or the closing price (for bearish candlesticks), reflecting the support the stock price received during its decline.

（Source: Wikipedia）

Unique candlestick patterns, like the hammer (small body, long lower wick at a downtrend's end, hinting at a potential bottoming-out) and the engulfing pattern, consist of two candlesticks. If the body of the second candlestick completely covers the body of the first and the two candlesticks are of opposite colors, it often signals a strong trend reversal. A bullish engulfing pattern (preceded by a bearish candlestick and followed by a bullish one) suggests the stock price may turn from a downtrend to an uptrend. Conversely, a bearish engulfing pattern (preceded by a bullish candlestick and followed by a bearish one) implies that the stock price may shift from an uptrend to a downtrend.

（Source: Wikipedia）

Bar Chart

The bar chart presents changes in stock prices simply, using vertical bars to represent stock prices over different periods. The height of each bar indicates the price fluctuation range, with the top corresponding to the highest price and the bottom to the lowest price. The position where the bar intersects with the coordinate axis represents the opening and closing prices (some bar charts may only show the closing price).

The advantage of the bar chart is that it allows investors to quickly review the general trend and fluctuation range of stock prices. It is especially useful when comparing price changes across different periods. Compared to the candlestick chart, the bar chart presents information more concisely, making it easier for investors who are unfamiliar with complex chart analysis to understand.

Line Charts

Line charts show the stock prices by plotting the changes of the closing prices over time. This simple format provides a clear visualization of long-term trends, making it particularly useful for identifying general market movements. Line charts are often the starting point for traders new to technical analysis due to their straightforward nature.

（Source: Wikipedia）

Technical indicators are mathematical calculations based on historical price and volume data, used by traders to forecast future price movements. They are essential tools in technical analysis, offering insights into market trends and investor behavior. (e.g., SMA, EMA)

Types of Technical Indicators

• Trend Indicators

Moving Average (MA): Smooths price data by calculating the average price over a specific period, making it easier to observe market trends. Common types include Simple Moving Average (SMA) and Exponential Moving Average (EMA).

Moving Average Convergence Divergence (MACD): Calculated from the difference between long-term and short-term smoothed moving averages. The crossovers of the DIF line and the DEA line, along with changes in the histogram, are used to determine changes in stock price trends, often to spot stock trading opportunities.

• Volume Indicators

On-Balance Volume (OBV): Composed of a series of "N"-shaped waves, using the "N"-shape as the fluctuation unit. It infers stock price trends by analyzing the trend of trading volume changes.

• Oscillator Indicators

Relative Strength Index (RSI): Measures the relative strength of a stock by comparing the magnitude of its price increases and decreases over a period.

Stochastic Oscillator (KDJ): Evaluates overbought and oversold market conditions by calculating the proportional relationship among the highest price, lowest price, and closing price in a recent period, integrating concepts of momentum, strength indicators, and moving averages.

Interpreting Technical Indicators

• Moving Averages (MA)

Moving averages are among the most frequently used technical indicators, designed to smooth out price data to identify trends over a specific period. They help traders understand the underlying direction of the market by filtering out the noise from random price fluctuations. There are various types of moving averages, such as the Simple Moving Average (SMA), Weighted Moving Average (WMA), and Exponential Moving Average (EMA), each calculated differently to provide varying insights into price movements.

Applications of Moving Averages

Trend Direction: A "golden cross," where short-term moving averages cross above long-term moving averages, signals a buy, indicating potential price increases. Conversely, a "death cross," where short-term moving averages cross below long-term moving averages, signals a sell, suggesting potential price declines.

Support and Resistance Levels: When stock prices retrace near moving averages, the averages act as support. Conversely, when prices rebound near moving averages, they act as resistance.

Trend Strength: Prices above rising moving averages indicate strong buying pressure, justifying holding shares. Prices below falling moving averages suggest bearish dominance, advising caution against blind buying.

The chart shows three 20-day moving averages - SMA, EMA, and WMA.

(Source: Wikipedia)

• Relative Strength Index (RSI)

Developed by J. Welles Wilder Jr. in 1978, the RSI is a valuable tool for traders to identify potential reversals and gauge the strength of price trends. The RSI is a momentum oscillator that measures the speed and change of price movements, indicating overbought or oversold conditions in the market.

The RSI indicator ranges from 0 to 100. Investors analyze its value to gauge overbought and oversold market conditions and identify stock price trends and trading opportunities. Generally, an RSI value above 70 indicates overbought conditions, meaning the stock price has had a significant short-term increase, exhausting bullish power, and the market may be overheated, likely to correct. An RSI value below 30 indicates oversold conditions, suggesting the stock price has experienced a significant short-term decline, with excessive bearish pressure, and the market may rebound.

The above picture is a candlestick chart, and the picture below is a 14-day RSI, where the overbought zone is set above 70; the oversold zone is set below 30.

(Source: Wikipedia)

Investors can also combine price trends with RSI crossover signals to determine trading timing. When the RSI crosses above 30 from the oversold zone, it's a buy signal. When the RSI crosses below 70 from the overbought zone, it's a sell signal.

Additionally, the divergence of the RSI indicator provides valuable insights. When the stock price reaches a new high but the RSI fails to make a new high, it forms a "top divergence," indicating insufficient upward momentum and a potential reversal. Similarly, when the stock price reaches a new low but the RSI does not, it forms a "bottom divergence," suggesting that downward momentum is weakening, and the market may bottom out and rebound.

Combining Multiple Indicators for Analysis

In stock investment, relying solely on a single technical indicator has limitations. Making trading decisions based on just one indicator makes it difficult to fully understand the market, thus easily leading to investment mistakes. Therefore, investors need to combine multiple technical indicators for comprehensive analysis to improve the accuracy of their judgments.

For example, combining the moving average and the RSI indicator is a common and effective analysis method. The moving average helps determine the stock price trend, while the RSI indicator measures the market's buying and selling power and overbought and oversold conditions. When the moving average indicates an upward stock price trend and the RSI indicator rebounds from the oversold zone, it is a reliable buy signal. For instance, if a stock's 5-day and 10-day moving averages show a bullish crossover and the RSI indicator rises from below 30 (the oversold zone) to above 50, investors can consider buying.

Conversely, when the moving average shows a downward stock price trend and the RSI indicator drops from the overbought zone, it is a strong sell signal.

Limitations of Technical Analysis

• Subjectivity and Variability

One of the main limitations of technical analysis is its subjectivity. Traders often interpret charts and patterns differently, leading to varied conclusions about future price movements. This subjectivity can result in inconsistent trading decisions, as patterns that appear significant to one analyst may seem irrelevant to another. Furthermore, recognizing geometric shapes and patterns in price charts often depends on the individual trader's experience and biases.

• Market Efficiency

Technical analysis assumes that market prices reflect all available information, but the Efficient Market Hypothesis (EMH) argues otherwise. According to EMH, prices already incorporate all relevant information, making it difficult for technical analysis to provide an edge in trading decisions. Some critics argue that technical analysis may not reliably predict future market behavior because price movements may be largely random or influenced by unforeseen events.

• Limited Scope

Technical analysis primarily focuses on price movements and trading volumes, often neglecting fundamental factors that can significantly influence a security's value. For instance, changes in a company's earnings, macroeconomic conditions, or geopolitical events can drastically affect stock prices, yet these elements are typically outside the scope of technical analysis. Traders relying solely on technical analysis may miss critical information that could impact their investment decisions.

• Dependence on Historical Data

Another limitation lies in the reliance on historical data for backtesting trading strategies. While past performance can offer insights into potential future behavior, it does not guarantee that similar patterns will occur again. Market conditions, regulatory environments, and investor behavior can change over time, rendering historical data less applicable in the present context.