Technical Analysis Stock Trading – How?

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)

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)

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.

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)Investing Books) .

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?

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.