Mastering technical analysis may sound very difficult, and while it’s true it is not easy, with a few clicks of the mouse you can learn the basics and start trading more successfully.
The foundation of technical analysis is the chart, writes algorithmic trader Surya Kamal. There are two charts that are heavily used in technical analysis: the line chart and the candlestick chart. The line chart shows the performance of a stock over a given time period. A candlestick chart displays stocks open high, low, and closing prices.
Moving on to tools, one of the most popular is the moving average. To get a moving day average for a specific time period, add the closing price of a stock for the last, say 30 days and then divide by 30 to get the 30-day moving average.
How might this help you trade, you ask?
If the stock price is above its 30 day moving average, it means that investor’s current expectations (the current price of the stock) are higher than average over the last 30 days, and that investors are becoming increasingly bullish, putting upward pressure on the stock, which could then move higher.
Conversely, if today’s price is below its 30 day moving average, it shows that current expectations are below average over the last 30 days and the stock may move lower.
The relative strength indicator (RSI) is another one of the most used and well-known leading momentum indicators in technical analysis, says Kamal. The main use of RSI is used to find whether the stock is overbought or oversold. The RSI indicator presents a range of between 0 and 100. If the RSI is above 70 then the stock is considered overbought. If it drops below 30, the stock is seen as oversold.
Matt Choi of Certus Trading, who offers a course in Mastering Technical Analysis, says he can find high-probability target opportunities in a number of markets, including stocks, forex, bonds, commodities, futures and exchange-traded funds.
Matt Choi is a Chartered Market Technician (CMT) which means that 99% of how he trades the market is via technical analysis — the other 1% is his instinct and experience. Since technical analysis is primarily based on price action and repetitive patterns, it is 100% quantifiable and in turn, can be used to develop rule-based strategies and systems.
“As such, mastering technical analysis serves as the foundation of consistent and profitable trading,” Choi explains.
Alan Redman’s book Mastering Technical Analysis, reveals the methods and techniques he has used to help readers ramp up their trading performance. The book covers chart reading, understanding indicators, how to spot a trend and how to prepare a personal trading plan, among other subjects.
Although this has been a brief introduction to technical analysis, there is so much more to learn. Consider a course or start reading online. You’re bound to find something of interest that will help you master technical analysis.