Initial Thoughts: Variables to Consider

Based on research of important variables that traders consider, I narrowed down to this list:

• Time
• This is essentially the main standard that is used to benchmark any of the other variables above. The crucial aspect of technical analysis involves looking at how patterns evolve, and these trends are captured by the time variable - usually daily.
• Closing Stock Price
• This is subject to least volatility since intra day prices vary depending on trading volume at that time, and is not easily comparable. For trend analysis, the closing stock price fully prices in the activities that happened throughout the day, and allows for comparison between different stocks. 
• Volume
• The volume indicates the amount of activity that stock has had in a day. Usually, high volumes of trade are correlated with fluctuations in the closing stock price, and also possible external events that have caused this sudden increase/decline in activity. 
• Percentage change in price vs. percentage change in index
• This is an important metric to gauge the correlation between the stock and the market index (either the S&P500 or Dow Jones). This correlation is a proxy for the 'beta' of the stock, hence indicating the variance or movement of the stock compared to the market. 
• Last Twelve Monts (LTM) Return
• At any point in time, this metric will allow a trader to see the return of the stock that past year. For example, the LTM return on March 10th 2012 will show the return that the stock has yielded since March 10th 2011. This single metric alone can raise the necessary red flags, and give an indication of how the stock, and thus the company has been performing. 
• Free float percentage
• This measures the liquidity of the stock in the open market. The free float shows what percentage of the total shares authorized are out open in the public, and available for trade. The free float can be looked at in conjunction with price and volume, to examine potential correlation and causality that can happen when companies decide to repurchase or issue stocks into the market. 
• Price to Earnings Ratio
• The P/E ratio is a rough metric to gauge whether the stock is over or undervalued. If the P/E ratio is well below industry averages, it is undervalued, and hence might be a good longterm investment. Conversely, a high P/E ratio indicates an opportunity for traders to short the stock. 

Understanding Current Stock Charts

Now that I know I want to focus on technical analysis I decided look at what is currently used so I become familiar with indicators traders use.

Stock Charts

X axis: time - intraday, week, month year

Y axis: Price - absolute price or logarithmic for price % changes

Chart Types

Line Chart

The most basic of the four charts is the line chart because it represents only the closing prices over a set period of time. The line is formed by connecting the closing prices over the time frame. Line charts do not provide visual information of the trading range for the individual points such as the high, low and opening prices. However, the closing price is often considered to be the most important price in stock data compared to the high and low for the day and this is why it is the only value used in line charts.

Bar Charts

The bar chart expands on the line chart by adding several more key pieces of information to each data point. The chart is made up of a series of vertical lines that represent each data point. This vertical line represents the high and low for the trading period, along with the closing price. The close and open are represented on the vertical line by a horizontal dash. The opening price on a bar chart is illustrated by the dash that is located on the left side of the vertical bar. Conversely, the close is represented by the dash on the right. Generally, if the left dash (open) is lower than the right dash (close) then the bar will be shaded black, representing an up period for the stock, which means it has gained value. A bar that is colored red signals that the stock has gone down in value over that period. When this is the case, the dash on the right (close) is lower than the dash on the left (open).

Source: http://www.investopedia.com/university/technical/techanalysis9.asp

Introduction to Technical Analysis

How is analysis done?

Stock market investors make their decisions based on two different kinds of analysis – the first is known as fundamental analysis and the second as technical analysis.

Technical analysis is a study of share price patterns in the past, while fundamental analysis looks at the company's financial condition, management and competitive position in its industry or sector. For finding investing decision, fundamental analysts look at a company’s annual report while a technical analyst looks at the chart of the stock’s price movements in the history. 

Differences between technical and fundamental

While fundamental analysts examine earnings, dividends, new products, research and the like, technical

analysts examine what investors fear or think about those developments and whether or not investors have the wherewithal to back up their opinions; these two concepts are called psych (psychology) and supply/demand.

Technicians employ many techniques, one of which is the use of charts. Using charts, technical analysts seek to identify price patterns and market trends in financial markets and attempt to exploit those patterns. Technical analysis is frequently contrasted with fundamental analysis, the study of economic factors that influence the way investors price financial markets. Technical analysis holds that prices already reflect all such trends before investors are aware of them.

In terms of applications, technical analysis is used for trading while fundamental is used for investing. Since technical analysis requires the use of charts and graphs I am going to concentrate on technical analysis.

Important aspects of technical analysis

• Trends
• upward,downward horizontal
• Trend Lengths
• Support and Resistance
• Support: price level through which a stock or market seldom falls
• Resistance: price level a stock seldom surpasse
• Important part of trends because it can be used to make trading decisions and identify when a trend is reversing. For example, if a trader identifies an important level of resistance that has been tested several times but never broken, he or she may decide to take profits as the security moves toward this point because it is unlikely that it will move past this level.
• Test and confirm trends and need to be monitored by anyone who uses technical analysis
• Volume
• The number of shares or contracts that trade over a given period of time, usually a day.
• The higher the volume, the more active the security. To determine the movement of the volume (up or down), chartists look at the volume bars that can usually be found at the bottom of any chart. Volume bars illustrate how many shares have traded per period and show trends in the same way that prices do.
• Volume should move with the trend. If prices are moving in an upward trend, volume should increase (and vice versa). If the previous relationship between volume and price movements starts to deteriorate, it is usually a sign of weakness in the trend.