Technical analysis of stocks

Technical analysis is one of the methods used by investors and traders for stock investment. In short, this form of analysis helps traders make a decision on whether to buy or sell a stock. Investors and traders need to analyze a stock’s price movement, understand the conditions affecting its current price, and determine how the price will move in the future. When the conditions affecting the stock price have been determined, investors and traders are much less likely to mistakenly buy or sell it. Technical analysis tools can also be used to determine price trends.

For conducting technical analysis on stocks, there are some indicators that you first need to know about and know how to use. Indicators use a mathematical calculation based on historical price data and visualizes that data in the form of a line or other graphical elements on a chart. Indicators can recognize stock price trends and signal good moments to enter and exit the market.

Technical analysis tools are also used by investors looking to buy and hold stocks for the long term, whereas for traders, they are useful for determining which stocks will provide beneficial returns in the short term. With technical analysis, we can determine the right time to enter the market and the right time to exit the market.

Read more: How to pick stocks: Two different approaches

Technical analysis indicators for stock trading

Generally, technical indicators provide an overview of the supply and demand of stocks as well as a psychological snapshot of the market. In general, there are two basic types of technical analysis indicators that you need to know about:

MACD

MACD is used to show trend strength. This indicator consists of two lines, namely the MACD line and the signal line, which moves slower.

When above zero, the signal line indicates that an uptrend is in progress. Furthermore, if the line is below the zero point, then a downtrend is in progress.

Fig. 1. The MACD indicator

Relative Strength Index (RSI)

The RSI is a reference line for conducting technical analysis of stocks, and is in the form of a middle number or zero. By default, the RSI is at 30 and 70, and indicates overbought and oversold conditions. If the price reaches or exceeds 70 on the RSI, then the asset is considered overbought. Conversely, if the price reaches or dips below 30, the asset is considered oversold. 

Fig. 2. The RSI indicator

The RSI can also be an indicator of support and resistance levels.

Stochastic oscillator

This indicator is used to measure the current price relative to the price range within a certain period. Similar to the RSI, the Stochastic oscillator consists of two lines located at zero and 100. The lines are usually blue and red. If the blue line is above the red line, it signals an uptrend, while the blue line intersecting the red line means that the trend is likely to be going down.

Fig. 3. The Stochastic oscillator

Conducting technical analysis of stocks

To do a technical analysis of stocks, you can start by looking at market movements, familiarizing yourself with technical analysis indicators and seeing how history repeats itself. Make sure you use market movements as a reference when doing analysis, as price movements themselves are a reflection of current conditions. They can be caused by a number of factors such as natural disasters, politics and the psychological condition of market participants. This is why it’s crucial to keep yourself up to speed with the news, ride the wave of volatility and develop a strong understanding of trading psychology — namely, your own.

Here’s a handy guide for a basic technical analysis method that we’ve put together:

• Observe a trend occurring on a stock’s price chart.
• Set support and resistance levels on the chart so that buy and sell signals are clearer.
• Use a moving average indicator to identify whether a stock is in an uptrend or a downtrend.
• Use an oscillator to determine the possibility of a change in the current trend.
• Set a minimum price limit or a Stop Loss to minimize losses in stock trading.

Conclusion

Traders conducting technical analysis of stocks are generally of the mindset that history repeats itself. Technical analysis tools highlight repeating patterns in stock prices, thus making it easier to trade on stocks successfully. It’s important to use indicators that best suit your needs for determining investment and trading quickly and precisely. To make things a bit easier for you, we’ve compiled a list of the 10 best trading indicators, go check it out! Technical analysis isn’t the answer to all a trader’s prayers, though. We also recommend familiarizing yourself with fundamental analysis techniques to help guide your investment decisions.

Join Gapflix Trade, take advantage of the multiple trading tools available and become a force to be reckoned with on the markets!

Risk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.