Technical analysis of stock trends – Volume, Aroon and Fibonacci
Technical analysis is one of the most popular techniques used by investors and experts to analyze the stock whether it is the current situation of the stock or the trending. Using technical analysis of stock trends the investor is able to determine whether the stock is overbought or oversold. If the investor is able to use various technical indicators, he should be able to correlate them and see the bigger picture.
The technical analysis of stock trends can be done by combining the three main tools which can give a larger picture to the investors. These indicators can give the investors the edge over non informed investors to make profitable trades. Let us look at all the tree tools and see how to make use of them together.
Volume – Volume of a stock says a lot about the current situation of a stock. Volume is defined by the number of shares of a particular stock which are being traded within a period like an hour, week or a month. The volume of a stock is generally low when the share price is not moving much and it moves in a near straight line. The stock volume is generally much higher when the stock moves upwards or downwards. Usually, sudden high volume indicates a new trend which may be upwards or downwards. By using volume in conjunction with movements in the stock you can spot the right areas to get into a trade.
Aroon Indicator – Aroon indicator was developed by Tushar Chande in 1995 to determine the trend direction and the strength of the stock. This indicator tells the investors when a long term trend is ending. Aroon indicator is calculated as below:
Bullish – [(# of periods) - (# of periods since highest high)] / (# of periods)] x 100
Bearish – [(# of periods) - (# of periods since lowest low)] / (# of periods)] x 100
The investors look for a move below or above the zero level mark to see the trend of the stock.
Fibonacci Analysis – Fibonacci numbers are the numbers in a series in which the following number is the sum of previous two numbers. The series start with 1, 1 2, 5, 8, 13, 21 and so on. Fibonacci series as a trading tool has been used by traders for a long time and it is still hugely popular. There are five types of trading tools that are based on Fibonacci’s discovery: arcs, fans, retracements, extensions and time zones. The lines created by these Fibonacci studies are believed to signal changes in trends as the prices draw near them. This theory assumes that a stock will usually retrace to a certain percentage after moving up or down to a level of a support or resistance.
Putting volume, Aroon and Fibonacci together – When investors put these three indicators together, they can pinpoint the trend of a stock. The volume will denote the fear or enthusiasm of investors in that stock, Aroon will denote whether the stock is beginning to move from an existing trend and Fibonacci will tell whether the stock has hit its level of resistance or support. Technical analysis of stock trends make much more sense if the investors put these indicators together to get the direction of the stock movement.
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