Technical Analysis Stock Trading
What is technical analysis in stock trading?
If you find yourself asking – what do I need to be successful in the stock market – the answer is technical analysis. It doesn’t matter if you’re a long-term investor or a short-term trader. Technical analysis will make you a better trader.
Technical analysis is the study of how the price of a share of stock or index is moving on a stock market chart. It usually involves the use of an indicator or oscillator to measure various aspects of price, including trends, price ranges, price and volume combinations, rate of change, etc. The idea for using technical analysis is that prices are not completely random, but rather, they follow price patterns.
If you look at a chart you'll see that daily prices for the most part, connect from day to day. The daily price of a stock has a relationship with the prior day’s action and so on. Even stocks with volatile price movements have a day-to-day relationship and subsequently, create a pattern of movement.
Every stock move is driven by one of three emotions:
Fear
Greed
Uncertainty
Uncertainty is the pit stop between fear and greed, the two most dominate emotions.
When the most dominant group of stock traders in a stock are being driven by greed, the stock will rise.....when the most dominant group of stock traders in a stock are being driven by fear, the stock will sink.....and when the most dominant group is uncertain, the stock will stabilize and the stock price will remain flat.
If we go a little deeper, technical analysis is also a way to read true trader sentiment about a stock because what makes the price of a stock go up or down is whether the majority of traders want to buy it or sell it. And so, price patterns are created when buyers and sellers react/respond to price action.
Prices Move in Trends -
History Always Tend to Repeat Itself -
What is technical analysis in stock trading?
If you find yourself asking – what do I need to be successful in the stock market – the answer is technical analysis. It doesn’t matter if you’re a long-term investor or a short-term trader. Technical analysis will make you a better trader.
Technical analysis is the study of how the price of a share of stock or index is moving on a stock market chart. It usually involves the use of an indicator or oscillator to measure various aspects of price, including trends, price ranges, price and volume combinations, rate of change, etc. The idea for using technical analysis is that prices are not completely random, but rather, they follow price patterns.
If you look at a chart you'll see that daily prices for the most part, connect from day to day. The daily price of a stock has a relationship with the prior day’s action and so on. Even stocks with volatile price movements have a day-to-day relationship and subsequently, create a pattern of movement.
Every stock move is driven by one of three emotions:
Fear
Greed
Uncertainty
Uncertainty is the pit stop between fear and greed, the two most dominate emotions.
When the most dominant group of stock traders in a stock are being driven by greed, the stock will rise.....when the most dominant group of stock traders in a stock are being driven by fear, the stock will sink.....and when the most dominant group is uncertain, the stock will stabilize and the stock price will remain flat.
If we go a little deeper, technical analysis is also a way to read true trader sentiment about a stock because what makes the price of a stock go up or down is whether the majority of traders want to buy it or sell it. And so, price patterns are created when buyers and sellers react/respond to price action.
Technical Analysis Stock Trading - Why? Know Where Price Is
A reason to use technical analysis stock trading is you should want to have, at least, some basic knowledge of what any stock’s price is doing before you buy it. Otherwise, if you have absolutely no knowledge of what price is doing – you’re basically buying in a vacuum. Most stock traders want the price to be moving in the right direction to capture a gain and that’s why technical analysis is so important.
Fundamentals Aren’t Enough
To put it in perspective, traditionally, there are two general ways to pick stocks. One is to use fundamentals or the financial numbers of a company. The idea in using fundamentals is to look for numbers based on growth or value that appear to tell a story of how the price of a share of stock would be expected to move.
To assume that a stock price must go up because of earnings, low valuation, etc. isn’t enough information to make really good trades. There’s example after example of stocks that have good fundamentals and aren’t increasing in price.
The way to be successful as an investor is to combine fundamental study with some kind of technical analysis stock trading. Using technical analysis, a stock trader is reading what the price is currently doing and making trading decisions based on more information than just fundamentals.
Human Psychology
As mentioned above, the way price is moving describes what the majority of people interested in the stock really think about it and where they think it’s going to go. If you really think about why the price of a stock goes up –it’s because people are buying it. So why do people buy a stock? There are a lot of reasons why, but does that truly matter? At the end of the day, what really matters is how the price is moving and that's how technical analysis stock trading comes into play.
And, the interesting thing is that human psychology repeats itself. If a stock is popular – like the popular kid in school – and people are buying it that will make its price go up.
If You Knew of A Way to Read Price Would You Use It to Your Advantage?
If you had a way to clearly understand that the price of stock was moving upward before making a decision to enter into a position wouldn’t you use it?
On the flip side, if you had a way to read that many people were exiting the position in the stock and driving the price down wouldn’t you want the opportunity to exit before you felt like you were the last shareholder?
By examining price action to determine which force is prevailing, stock technical analysis focuses directly on the bottom lines:
What is the price?
Where has it been?
Where is it going?
Stock analysis is more an art form than a science. As an art form, it is open to interpretation and each stock trader should use only that which suits their style and personality.Developing a technical style takes time, effort and dedication, and the rewards can be great!
Additionally, many traders and investors use financial news stations to gather information to influence trading activity when price movement will tell you what it’s actually doing. Why not use an unbiased tool that offers the information you need at a glance using what is rather than what might be.
A reason to use technical analysis stock trading is you should want to have, at least, some basic knowledge of what any stock’s price is doing before you buy it. Otherwise, if you have absolutely no knowledge of what price is doing – you’re basically buying in a vacuum. Most stock traders want the price to be moving in the right direction to capture a gain and that’s why technical analysis is so important.
Fundamentals Aren’t Enough
To put it in perspective, traditionally, there are two general ways to pick stocks. One is to use fundamentals or the financial numbers of a company. The idea in using fundamentals is to look for numbers based on growth or value that appear to tell a story of how the price of a share of stock would be expected to move.
To assume that a stock price must go up because of earnings, low valuation, etc. isn’t enough information to make really good trades. There’s example after example of stocks that have good fundamentals and aren’t increasing in price.
The way to be successful as an investor is to combine fundamental study with some kind of technical analysis stock trading. Using technical analysis, a stock trader is reading what the price is currently doing and making trading decisions based on more information than just fundamentals.
Human Psychology
As mentioned above, the way price is moving describes what the majority of people interested in the stock really think about it and where they think it’s going to go. If you really think about why the price of a stock goes up –it’s because people are buying it. So why do people buy a stock? There are a lot of reasons why, but does that truly matter? At the end of the day, what really matters is how the price is moving and that's how technical analysis stock trading comes into play.
And, the interesting thing is that human psychology repeats itself. If a stock is popular – like the popular kid in school – and people are buying it that will make its price go up.
If You Knew of A Way to Read Price Would You Use It to Your Advantage?
If you had a way to clearly understand that the price of stock was moving upward before making a decision to enter into a position wouldn’t you use it?
On the flip side, if you had a way to read that many people were exiting the position in the stock and driving the price down wouldn’t you want the opportunity to exit before you felt like you were the last shareholder?
By examining price action to determine which force is prevailing, stock technical analysis focuses directly on the bottom lines:
What is the price?
Where has it been?
Where is it going?
Stock analysis is more an art form than a science. As an art form, it is open to interpretation and each stock trader should use only that which suits their style and personality.Developing a technical style takes time, effort and dedication, and the rewards can be great!
Additionally, many traders and investors use financial news stations to gather information to influence trading activity when price movement will tell you what it’s actually doing. Why not use an unbiased tool that offers the information you need at a glance using what is rather than what might be.
Technical Analysis Stock Trading - How?
Basics Factors
Technical analysis is a method of analyzing a stock or company solely on statistics generated by market activity. This can include volume, historical prices, etc. Using these charts and patterns many can suggest and predict future activity. However, plain and simple, technical analysis is only based on three assumptions.
1. The market discounts everything.2. Prices move in trends
3. History always tends to repeat itself.
The Market Discounts Everything -
Basics Factors
Technical analysis is a method of analyzing a stock or company solely on statistics generated by market activity. This can include volume, historical prices, etc. Using these charts and patterns many can suggest and predict future activity. However, plain and simple, technical analysis is only based on three assumptions.
1. The market discounts everything.2. Prices move in trends
3. History always tends to repeat itself.
The Market Discounts Everything -
One major critic about technical analysis is the fact it only takes into consideration price movement. Analysts looking for technical indicators ignore fundamental factors. The way they get around is by the theory that at any given time, a stocks share price will reflect everything that could possibly affect a company. This includes the effects brought on by fundamental factors. Since these factors are already priced into the stock, they believe all that matters is the analysis of price movement, which basically is the supply and demand of a stock.
Prices Move in Trends -
This basically means that the price movements will follow similar patterns. It all comes down to assumption and the analyst assumes that the trends will follow on a similar pattern.
History Always Tend to Repeat Itself -
The market repeats itself in its patterns of price movements. Analyzing charts for the past 100 years you can see everything follows a similar pattern so a could technical analyst will be able to read when the next trend is coming.
Here are some easy ways to use technical analysis in your trading with one or two applicable indicators:
Trend - Look to see if the stock price is in a trend? Is it going up or down? Is it a newly established trend or a stale one? (Indicators:Moving Average [MA], Average Directional Index [ADX], MACD)
There are three types of trends: Long-Term Trends, Medium-Term Trends, and Short-Term Trends.
The Long-term trend is over a year, the Medium-term trend is one to three months, and short-term is less than a month. If you are a long-term investor all you should worry about is the Long-term trend. If you look its a recipocal cycle for the stock to fluctuate with ups and downs, however long-term companies usually all go up as seen by the chart to the right. In this case the Super Trend is the Long Trend, the Dot com Bust is the medium trend and the small falls and gains in between are the small trend. Thats why long-term investors don’t look at their investments on a daily basis as due to fluctuations it doesn’t make sense. On the contrary if you trade regularly the Medium-term trend might be more critical. Remember the two most important sayings on trends: “the trend is your friend” and “don’t buck the trend.”
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Support/Resistance – Look to see if the stock price headed toward a recent previous high or low in price? And how will the price act when it hits the same level as a recent high or low? Will the price move stop and reverse or break through? Or is the stock at a 52-week high or low and facing no resistance? (Indicators: Moving Average [MA], trend lines)
Support and Resistance can often be characterized as the on-going fight between the bulls and the bears or the struggle between supply and demand. This graph will help illustrate the difference: Support is the price level for which a stock or the market in general falls. Resistance is the price level it surpasses.
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Are you following along? Well read carefully as support and resistance levels are crucial factors involved within the markets. Simply they are the price levels at what traders/investors will buy or sell a stock at. When analyzing support and resistance price levels, round numbers come into play throughout a large amount of charts. Round numbers represent physiological turning points for a stock and become the price levels in which a stock plays off. Often traders/investors will purchase a stock at a price level that they don’t believe it will fall under. For example, Google support level could be $400 where whenever it reaches near that price level, investors buy large quantities. On the other hand, Google could have a resistance level of $500 where investors don’t believe it will continue to go up much further therefore selling off. So now that you know about the basics of support and resistance levels, lets analyze why it’s an important factor.
Support and resistance analysis is crucial for traders as if you can identify a important level of resistance that over time has never been broken you will most likely consider profit taking when it reaches near that level the next time as you believe it is unlikely the shares will exceed that level. They go side by side with trends, as normally a trend will conform to its support and resistance levels. One key tip to know when trading near support and resistance levels is never to place your order on the exact price. Due to increased volatility, when a stock price reaches this level there tend to be a high level of trading volume therefore you will most likely miss out. Therefore place your order a couple points above or under and all will be good.
Volume – Relates to interest in a stock. Abnormal volume can indicate abnormal buying or selling activity. (Chaikin Money Flow, OBV, Rate of Change [ROC])
Price patterns – supply & demand has the price gone up really fast with no pause? Or has the price movement “rested” and begun to continue in the trend direction? (Japanese Candlesticks, Cup with Handle)
Personally, the technical indicator I mainly use is ADX to find trending stocks then price (Japanese Candlesticks). Simple, and not overly complicated.
When deciding what technical analysis stock trading indicator you want to use think about what you are most interested in whether it be trend, support/resistance, etc. and what makes the most sense to you.
Additionally, a trader can use both fundamental and technical analysis together.
Follow The Money !
Here are some easy ways to use technical analysis in your trading with one or two applicable indicators:
Trend - Look to see if the stock price is in a trend? Is it going up or down? Is it a newly established trend or a stale one? (Indicators:Moving Average [MA], Average Directional Index [ADX], MACD)
There are three types of trends: Long-Term Trends, Medium-Term Trends, and Short-Term Trends.
The Long-term trend is over a year, the Medium-term trend is one to three months, and short-term is less than a month. If you are a long-term investor all you should worry about is the Long-term trend. If you look its a recipocal cycle for the stock to fluctuate with ups and downs, however long-term companies usually all go up as seen by the chart to the right. In this case the Super Trend is the Long Trend, the Dot com Bust is the medium trend and the small falls and gains in between are the small trend. Thats why long-term investors don’t look at their investments on a daily basis as due to fluctuations it doesn’t make sense. On the contrary if you trade regularly the Medium-term trend might be more critical. Remember the two most important sayings on trends: “the trend is your friend” and “don’t buck the trend.”
.png)
Support and Resistance can often be characterized as the on-going fight between the bulls and the bears or the struggle between supply and demand. This graph will help illustrate the difference: Support is the price level for which a stock or the market in general falls. Resistance is the price level it surpasses.
.png)
Support and resistance analysis is crucial for traders as if you can identify a important level of resistance that over time has never been broken you will most likely consider profit taking when it reaches near that level the next time as you believe it is unlikely the shares will exceed that level. They go side by side with trends, as normally a trend will conform to its support and resistance levels. One key tip to know when trading near support and resistance levels is never to place your order on the exact price. Due to increased volatility, when a stock price reaches this level there tend to be a high level of trading volume therefore you will most likely miss out. Therefore place your order a couple points above or under and all will be good.
Volume – Relates to interest in a stock. Abnormal volume can indicate abnormal buying or selling activity. (Chaikin Money Flow, OBV, Rate of Change [ROC])
Price patterns – supply & demand has the price gone up really fast with no pause? Or has the price movement “rested” and begun to continue in the trend direction? (Japanese Candlesticks, Cup with Handle)
Personally, the technical indicator I mainly use is ADX to find trending stocks then price (Japanese Candlesticks). Simple, and not overly complicated.
When deciding what technical analysis stock trading indicator you want to use think about what you are most interested in whether it be trend, support/resistance, etc. and what makes the most sense to you.
Additionally, a trader can use both fundamental and technical analysis together.
Follow The Money !
Technical analysis of stock market companies is also the art of following the flow of money.Stock market analysis is the examination of price past movements to forecast future price movements.
Technical analysts believe that the current stock price fully reflects all information. Because all information is already reflected in the price, it represents fair value and should form the basis of analysis.
A technician believes that it is possible to identify with a trend and make money as the trend unfolds. Because stock analysis can be applied to many different time-frames, it is possible to spot both short-term and long-term trends.
Technical analysts are concerned with two things:
1. What is the current price?
2. What is the history of the price movement?
Technical analysts believe that the current stock price fully reflects all information. Because all information is already reflected in the price, it represents fair value and should form the basis of analysis.
A technician believes that it is possible to identify with a trend and make money as the trend unfolds. Because stock analysis can be applied to many different time-frames, it is possible to spot both short-term and long-term trends.
Technical analysts are concerned with two things:
1. What is the current price?
2. What is the history of the price movement?
The price is the end result of the battle between the forces of supply and demand for the company's stock. The object of technical stock analysis, is to forecast the direction of the price.
Technical analysts consider the stock market to be 80% psychological and 20% logical.Fundamental analysts consider the stock market to be 20% psychological and 80% logical.
Technical analysts consider the stock market to be 80% psychological and 20% logical.Fundamental analysts consider the stock market to be 20% psychological and 80% logical.
Psychological or logical may be open for debate, but there is no questioning the current price of a stock. The price set by the stock market reflects the sum knowledge of all participants.
And these participants have considered (discounted) everything under the sun and settled on a price to buy or sell. These are the forces of supply and demand at work.
Technical Analysis Stock Trading - Next Step?
The best thing to do is pick a handful of individual indicators and read about them. Start looking at them comparing the information they provide with how the price moved on a group of stock charts. A good book to get started with technical analysis is The Visual Investor: How to Spot Market Trends (Wiley Trading)![]()
(See all Investing Books)![]()
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Some of the most used technical indicators are:· Moving average
· MACD
· Stochastics
· RSI
· Average Directional Index (ADX)
There are many more specialized indicators, but the ones listed above are probably the most popular ones.Then look at the stocks you own or ones you’re considering to buy in a chart format with the indicators. Look at your most successful trades and see how the indicator behaved. Or, look at a group of the best stock market performers with various indicators enabled.
Remember, the first thing to look for in technical analysis stock trading is to look at how price is moving. If you asked me to pick one indicator as a starting point, I’d say look at moving averages – they’re very easy to understand and to begin to get a general sense of the study of how price is moving.
The best thing to do is pick a handful of individual indicators and read about them. Start looking at them comparing the information they provide with how the price moved on a group of stock charts. A good book to get started with technical analysis is The Visual Investor: How to Spot Market Trends (Wiley Trading)
Some of the most used technical indicators are:· Moving average
· MACD
· Stochastics
· RSI
· Average Directional Index (ADX)
There are many more specialized indicators, but the ones listed above are probably the most popular ones.Then look at the stocks you own or ones you’re considering to buy in a chart format with the indicators. Look at your most successful trades and see how the indicator behaved. Or, look at a group of the best stock market performers with various indicators enabled.
Remember, the first thing to look for in technical analysis stock trading is to look at how price is moving. If you asked me to pick one indicator as a starting point, I’d say look at moving averages – they’re very easy to understand and to begin to get a general sense of the study of how price is moving.
For example, open up a chart and add a 20-day simple moving average and 50-day simple moving average. Now look at the chart and ask these questions:
· Where is the last price of the stock in relation to the two MA lines?
· Is it above both lines? Between them or below both MA lines?
· Is the 20-day above the 50-day? Or, below?
· Has there been a recent crossover between two MA lines? Or, has there been recent price move over a MA?
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In the example of Morgan Stanley (MS) above you can easily see the price first moved below the blue, 20-day moving average line. The price then moved below the red, 50-day moving average line and continued for the most part to stay below that line. The 20-day moving average line then also crossed below the 50-day moving average line.
If an investor was dollar cost averaging every month into this position, it would have been quite disappointing. One could have speculated all the way down on MS, but understanding technical analysis stock trading will put you "in the know" of what a stock's price is doing. Looking at these simple lines on any stock chart will give you immediate information about how the stock’s price is moving and the ability to make much better decisions for taking positions.
Tip: As you move forward you can set up a stock market screener for the stocks that present the setups you’re looking for to trade.
There are no rules here. Except the ones you set for your trading. One can be strictly a fundamental trader, a technical trader, or a fundamental with technical trader. It’s up to what your philosophy about the things affect the price of a stock. Just know that if you use some method of technical analysis with any fundamentally appropriate stock you can take your trading to the next level.
· Where is the last price of the stock in relation to the two MA lines?
· Is it above both lines? Between them or below both MA lines?
· Is the 20-day above the 50-day? Or, below?
· Has there been a recent crossover between two MA lines? Or, has there been recent price move over a MA?
If an investor was dollar cost averaging every month into this position, it would have been quite disappointing. One could have speculated all the way down on MS, but understanding technical analysis stock trading will put you "in the know" of what a stock's price is doing. Looking at these simple lines on any stock chart will give you immediate information about how the stock’s price is moving and the ability to make much better decisions for taking positions.
Tip: As you move forward you can set up a stock market screener for the stocks that present the setups you’re looking for to trade.
There are no rules here. Except the ones you set for your trading. One can be strictly a fundamental trader, a technical trader, or a fundamental with technical trader. It’s up to what your philosophy about the things affect the price of a stock. Just know that if you use some method of technical analysis with any fundamentally appropriate stock you can take your trading to the next level.
In the end, successful stock trading stands on three pillars:1. You need to analyze the battle between the bulls and the bears.
2. You need to practice good money mangement.
3. You need discipline to follow your trading system and avoid getting high in the markets.
2. You need to practice good money mangement.
3. You need discipline to follow your trading system and avoid getting high in the markets.
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