Technical Analysis is one of the best ways a person can learn how to trade and invest in stocks. But with a plethora of different topics and indicators used for analyzing a stock's potential, it might seem all too overwhelming for the beginner investor or trader.
With that, here are the most important topics and indicators (in my opinion) to get started with technical analysis:
1. Candlestick Charts
Getting started with technical analysis, it is a MUST to learn how to read candlestick charts. They are the best and most popular way to learn how to read price action. Candlesticks alone can show you how prices have moved in a single minute, hour, day, week, or even longer, depending on your timeframe.
2. Support and Resistance
Support and resistance is another useful concept in stock trading. It helps determine the best and worst prices to buy a stock at. Prices tend to fluctuate from one value to another over time, and support and resistances can help you determine what these ranges are at a given point in time. It also helps you recognize the prices where buying and selling pressure are at their strongest.
3. Moving Averages
One of the most popular tools in technical analysis is the moving average. Given that prices tend to move up and down quite often, it is hard to determine the overall direction in which they are moving. Moving averages help you see the underlying trend of a given stock by showing you the average movement of a stock in a specific time frame. It helps drown out the minor price fluctuations and shows you the direction that the stock has been moving in.
4. Moving Average Convergence Divergence (MACD)
Moving average convergence divergence. Such a fancy name for a technical indicator! A derivative of moving averages, the MACD indicator is a powerful tool that gives you signals on when to buy and sell. It shows how buying or selling is picking up relative to a longer time frame. It also shows the strength of a particular stock trend, which is why it is one of the most popular technical indicators to date.
5. Relative Strength Index (RSI)
Following the MACD, the RSI is its partner in crime. The relative strength index shows the strength of momentum of a certain stock. Higher RSI value mean a stronger buying trend, while lower values mean a stronger selling trend. RSI can also give you signals on whether a stock has been overbought or oversold. This shows you the days where selling or buying is exaggerated, which means prices might have to swing the other way or settle down soon.
Conclusion
Technical analysis is an intricate puzzle one has to solve. Too many indicators can be confusing, while too few can be unhelpful. Choosing the right indicators that work together can help you analyze a stock's price movement much better.
I hope you take more time to study these 5 basics of technical analysis and use them to become a better trader and investor! Use these indicators along with Fundamental Analysis, and you won't go wrong!
Are there any indicators I missed out? What tools have helped you in your investing and trading? Let me know in the comments below! Would love to hear your ideas as well!