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[T108]Technical Analysis Of Stocks And

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Charts and graphs are a great tool to help you decide what stock to invest in. Trained analysts, however, see patterns that are used to predict future movements of stock prices. There are hundreds of different indicators and patterns that can be applied. With that wealth of information at your disposal, you will be better able to make plans for your financial future.

1. Patterns

If you see a high then a dip, you can invest during the dip period and expect to ride the second side of the dip back up to make a profit. They finally level out for a period (handle) before making a breakout a sudden rise in price. Investors who buy on the handle can make good profits.

Another popular pattern is Head and Shoulders. This is formed by a peak (first shoulder) followed by a dip and then a higher peak (the head) followed again by a dip and a rise (the second shoulder). This is taken to be a bearish pattern with prices to fall substantially after the second shoulder.

2. Indicators

Moving Average

The most popular indicator is the moving average. This shows the average price over a period of time. For a 30 day moving average you add the closing prices for each of the 30 days and divide by 30. The most common averages are 20, 30, 50, 100, and 200 days. Longer time spans are less affected by daily price fluctuations. A moving average is plotted as a line on a graph of price changes. When prices fall below the moving average they have a tendency to keep on falling. Conversely, when prices rise above the moving average they tend to keep on rising.

3. Relative Strength Index (RSI)

This indicator compares the number of days a stock finishes up with the number of days it finishes down. It is calculated for a certain time span usually between 9 and 15 days. The average number of up days is divided by the average number of down days. This number is added to one and the result is used to divide 100. This number is subtracted from 100. The RSI has a range between 0 and 100. A RSI of 70 or above can indicate a stock that is overbought and due for a fall in price. When the RSI falls below 30 the stock may be oversold and is a good time to buy. These numbers are not absolute they can vary depending on whether the market is bullish or bearish. RSI charted over longer periods tend to show less extremes of movement. Looking at historical charts over a period of a year or so can give a good indicator of how a stock price moves in relation to its RSI.

4. Money Flow Index (MFI)

The RSI is calculated by following stock prices, but the Money Flow Index (MFI) takes into account the number of shares traded as well as the price. The range is from 0 to 100 and just like the RSI, an MFI of 70 is an indicator to sell and an MFI of 30 is an indicator to buy. Also like the RSI, when charted over longer periods of time the MFI can be more accurate as an indicator.

5. Bollinger Bands

As an absoulte best indicator, be sure to check out bollinger bands which is a graph plotted along three lines. The upper and lower lines are plotted according to market volatility. When the market is volatile the space between these lines widens and during times of less volatility the lines come closer together. The middle line is the simple moving average between the two outer lines (bands). As prices move closer to the lower band the stronger the indication is that the stock is oversold the price should soon rise. The more information you have, the better decisions you can make.

I had never heard of technical analysis until I tried my hand at futures trading. Like most new traders my plan was to buy low and sell high, which is still the best way to buy and sell stocks. The problems start when we try and figure out what is low and what is high, that's where technical analysis comes in.

There are basically two ways to analyze a stock, one way is fundamental analysis. This type of analysis is conducted by analyzing a company's financial condition, are they profitable, are their products in demand, or how many sales have they made. This is a very simplistic view and will be explored in another article.

The second way to analyze a stock is by technical analysis. This widely used approach employs charts depicting price charts (daily or weekly), and trading volumes. Each price chart will show the opening price, the daily range and the closing price of a particular stock. Pure Technicians do not involve themselves with fundamental analysis. Technical analysis uses chart patterns to forecast future price movements. Fundamentalists also can use technical charts to determine entry and exit points where stocks are extended or have retraced a big price move and should commence a new up-leg.

Investment time periods vary from the day (day trading), to short term, to intermediate, to long term. Short term normally implies days to weeks, intermediate implies weeks to months, while long term means months to years.

Moving Averages suggest the smooth trends in the stock most often used by technical investors based on time horizon. First, let's define trendlines. An uptrend is a series of higher highs and higher lows. An up-trend is drawn underneath the beginning low and the lowest low of an up-move. A downtrend is a series of lower highs and lower lows. A downtrend line is drawn from the initial high to next highest high of the downtrend.

Now, let's define support and resistance. Support is an area of prior purchases which acts as a source of demand for the stock on the way down. Resistance is an overhead source of supply of stock to sell triggered by an area of prior purchases. Unsophisticated investors will not sell their losers, they will wait until the price returns to their entry level so that they can end the pain by selling at a breakeven. Likewise unsophisticated investors who at a lower level and saw the stock run up significantly only to return to their purchase are likely to buy at their prior entry level.

To keep it in its simplest form technical analysis uses Trends, Moving Averages, Support and Resistance levels to enter a trade as well as exit a trade. These technical indicators can be very useful in developing a trading system, that being said I want to issue a word of caution, I've been trading in one shape or form for the last 15 years and still learn every day.
My advice to you is read, study, learn then practice. There are many fine books out there on Technical Analysis, don't be afraid to buy one or two and learn as much as you can from them. A good book may cost you $50….A bad trade $500.

Article Source : How To Trade Stock

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