If you have read over a few of my other articles, you may have heard of me talking about technical analysis. Technicians rely solely on the charts rather than fundamental data. With technical analysis it is all about price action and ranges. With that said, there is a lot of reliance on indicators that are offered through chart websites or anywhere that you get your charts. I am talking about indicators such as MACD, MACD-Histogram, Bollinger Bands, Elliott Wave, ADX, etc. These tools help you try to decipher where the price of the underlying could be going.
Let’s describe a few of the basic indicators that you could use to help get your technical career off the ground. I will be going over the basics because they are the keys to your future, then you will be able to move on to more complicated indicators and such.
First we will look at the one of the most basic and widely used technical indicators, the MACD.
MACD stands for moving average convergence divergence and it is used as a trend following momentum indicator. It will help you identify the trend and determine its strength. A MACD graph has two lines that seem to move together. These are the MACD line and the “signal” line. When the MACD line crosses above the signal line that is a buy signal and if it crosses below the signal line that is a sell signal. It is also important to note that the graph that the MACD is plotted on contains a “zero” level where if the MACD falls below the zero line, it signals a turning in momentum. The flip side is true for a rising MACD above the zero line.
Moving Averages are the next basic tool that every technician uses. Moving averages show the trader where the momentum lies. Additionally, moving averages show areas of possible support and resistance and the current strength of the trend. The most popular moving averages are the 50 day and 200 day. These two moving averages represent long term shifts in the trend. What I mean by that is if the 50 day moves below the 200 day, that signals a bearish change in the long term trend. Conversely, if the 50 day moves above the 200 day, the long term trends shifts into a bullish format. Depending on your time horizon, you can change the value of the moving averages to more short term oriented signals.
By now you should have a basic idea of the MACD and moving averages. Mastering these concepts will help propel your trading career and your returns. While these two are considered indicators, I now have to talk to you about two very important signals; support and resistance.
Support is a level on the chart that represents a level where the stock has had difficulty falling under, historically. In plainer terms, it is a level that over time has supported the price from continuing its decline. Knowing where support is on a chart is essential because it can help you place better trades and give you idea of where to place stop orders. If a price falls below the support level, one of two things will happen. Either the price climbs right back above the support level, reconfirming the support or the stock will continue to fall making that former support a new resistance level, in theory.
Resistance is the opposite of support. The resistance area is a level where the stock is having a hard time moving past to continue its uptrend. Another way to describe resistance is a level where sellers begin to outnumber buyers. However, knowing where your resistance areas are can represent great trading opportunities. For instance, if a stock hits its long term resistance, it could be a good time to short the stock. It is not always that simple but with the help of your indicators it could paint a clearer picture.
The bottom line is that there are a lot of indicators to choose from. Some are great, some are not you must be the one to decide which are right for your trading strategy. Regardless of your strategy, it is imperative that you understand the basics that I have given to you in this article. The MACD, moving averages, support and resistance are the building blocks that you must understand before you climb to more complex indicators and signals.