Stock trading technical analysis doesn't have to be nearly as complex as you might think. In fact, the reality of trading is that some of the simplest technical analysis methods work the best over the long term. Let's start with a definition of technical analysis. Technical analysis is a method of stock research which uses Stock data to analyze the market. The data used is typically the price, time, and/or volume. There are 4 basic price points used in Stock analysis and they are the open, high, low, and close. These for price points in conjunction with time allow us to create Stock charts. Stock charts in turn give us a visual presentation of how a stock price changes over time.
Stock charts are particularly useful because they allow us to see the all important “perspective”…That is to say that charts allow us to see where price levels are in relation to one another. This allows us to visually see whether the trend is up, down, or sideways. This makes trend identification much simpler than if we had to look at your stock quotes in the business section of the newspaper every day and try to ascertain the trend in that manner.
The ultimate objective of stock trading technical analysis is the same as all Stock market research and that is to know:
What stock to buy or sell
When to get in or at which price level to purchase or sell
Quantity — how many shares should be traded
Risk level — how much of our account equity we should risk per trade
When to exit the trade — trades may be exited in any number of ways… The first way, of course, is the least desirable way and that is to have the trade move against us and trigger our exit at our predetermined risk level. The second way is to have the trade go in our direction. Once we are profitable we may employ any number of simple exit strategies to lock in our profits.
Along with the use of stock charts another way of visualizing stock price movement came about. Stock charts gave rise to technical indicators. Technical indicators are created using price, time, and/or volume. The single most popular stock trading indicator is known as the “moving average”. The moving average is very true to its name as it is simply an average that moves. Moving averages are plotted on the same scale as the stock price on the stock chart. As a stock's price trends upward then so does the moving average and the reverse is true when the stock price moves downward. The most common way to use a moving average can be expressed in the form of a simple stock trading system.
Buy stock XYZ when the price closes above the X period moving average
Sell stock XYZ when the price closes below the X period moving average
In our simple example above “X” can be any whole number and “period” can be any timeframe we choose. These variables represent the length of the moving average. “X period” could be anything from 10 day, to 60 minute, to 4 hour, etc. The shorter the moving average, the more sensitive it is to price movement and the longer the moving average is the less sensitive it is to price movement. A very commonly used moving average in the stock market is the 200 day moving average. If using it for Stock trading trades will be triggered less frequently than if we used the 10 day moving average instead.
As you can see from our simple examples stock trading technical analysis can be very straightforward. When used properly technical analysis is a very, very powerful tool.
Below is an example of a simple moving average. The green line represents a 30 day simple moving average of the Dow Jones Industrial Average
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