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Technical analysis is the study of a stock’s chart and it is very helpful in determining when to trade. There are literally hundreds, if not more, ways to approach this technique. I belong to the old school that believes simple is better. I do not like to put a lot of studies up on my charts. Some traders (typically day traders) will have many studies on their chart but that makes it very hard to see the trend of the stock (the most important part). Below, I will describe what I believe to be as the foundation to technical analysis.
First, the trend is king. The trend of the stock trumps all. If the stock is trending down, chances are its going to continue to go down. There are three main chart trends: the stock is either trending up, down, or sideways (channeling)
Next, are support and resistance levels. These are key to determining when to enter and exit a stock. A support level is the approximate price that the stock seems to fall to and not go any lower. Usually, you can confirm this by pulling the chart back a little and using crosshairs to match it up with previous support levels or dips in the chart.
A resistance level is the approximate price that a stock can’t seem to get over or the peaks on the chart. Once a stock breaks out and rises above its resistance level, the old resistance level now becomes the stocks support level.
Pretty simple, right? Once you have a good grasp of the stock’s overall trend, and support/resistance levels, then you have a good foundation to making better trades.
And lastly, because I am a believer in simple is better, I am only going to touch on one study that I will use. Its called MACD (pronounced Mack-D). This study is useful for an early indication of what the stock is going to do. If the MACD crosses the signal line going down, this is considered and exit point. If the MACD crosses the signal line going up, this is an entry point. The histogram shows you how much momentum the stock has, and the more pronounced or defined MACD cross, the more likelihood of the stock doing what it’s supposed to.
This, in a nutshell is technical analysis. Like I said earlier, there are literally hundreds of different paths to take here; but again, I believe in simpler the better. These tools should work just fine.
Fundamental analysis, like technical analysis, is another key component in understanding how to trade stocks successfully. Rather than studying the stock’s chart, fundamental analysis focuses mainly on researching the company behind the stock. This involves the companies earnings, news headlines, analyst ratings, etc. I have links on the side bar to some good websites for stock research. If you are looking for good analyst ratings, online brokers like Charles Schwab provide them to their clients for free.
Another key trading technique is understanding market sentiment. First thing you want to ask yourself is: what are the markets doing – are we in a Bear Market or are we in a Bull Market? Most individual stocks will follow the trend of the overall market. For instance, if the Dow is having a down day, most likely your stock is too. Investors seem to follow the crowds, and you will be more successfull going with the trend than against it.
Next, you want to look to economic reports, such as the CPI (consumer price index), the Jobs Report, or when the Feds meet. These reports usually can determine what kind of day the markets will have. However, the key word here is usually. Analysts will sometimes contradict themselves when it comes to what will happen to the markets with a good report or a bad report. For instance, if the stock market is very volatile, like it has been since 2007, the direction of the market can have no logical explanation.
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