Identifying extreme upswings and downtrends requires technical knowledge of the stock market. Most investment managers and traders develop a knack for predicting market fluctuations after years of learning. It is not a “hunch” that they follow but they put to use their years of experience along with strong data analysis.
One of the most reliable indicators that they scrutinize is historical data. As a beginner, you too can leverage technical analysis based on historical data and gain insights into the market. Let’s understand these signs that indicate the market extremes that will allow you to make wise choices.
1. Big events and their effects on price charts
Investors who regularly invest or even beginners have their favorite yardsticks, charting signals, and other technical tools that they religiously follow. You too can use these charts to make a market analysis. All you have to do is analyze the buyer behavior post a major market event. These events could be earning reports and balance sheets by companies, political events, global factors etc. These tools provide an insight into the market fluctuations and how buyers reacted after a major event. While not always true, these events can be leveraged to make educated guesses about market movements.
2. Peak points are red flags
The surge in the volume of trade often determines the trading value. So, for instance, if the market peaks at a certain price for a long period of time it means that it holds more value. If you follow technical tools and price charts you will notice that these trends get flagged. When this phenomenon occurs the prices reach the highest points and then stop or reverse.
3. Relative Strength Index (RSI)
This is a technical tool that most investors rely on. This tool allows you to gain insights into the historical data of peak price gains and losses. The main motive behind using this tool is to identify oversold and overbought stocks and the prevailing market conditions. Ideally, you can observe this tool for 14 days which provides accurate indications. A reading above 70 usually signifies overbought conditions and readings below 30 generally signifies oversold conditions.
4. Recent trends as important as historical data
While it is important to learn the trends from the historical data, it is also important to know the recent trends. If you are a regular trader and believe in trading intraday or for short-term gains then recent trends are extremely crucial for you. Know the tools well and identify when the market turned bullish or bearish in the recent past to base your investment decisions.
5. Double tops and bottoms
On the other hand, if you are aiming for long-term investments then follow the monthly trends. Because these monthly highs and lows often tell you when the market may reverse. This phenomenon of the market to reverse is called double top or bottom. This usually occurs when the market reaches a certain old pattern of price.
So, these are some signs that you must watch out for if you want to spot market extremes. If you need any assistance, we will be happy to help.
