What Are The Key Components In Technical Analysis:
If you are a new investor and you are choosing to use technical analysis for your style of research then you need to know what you are looking for and figure out what it means. Now if you look at advanced charts and you see the MA 20, 50, 200 and trend lines, you need to know what it means for a stock to be above or below the MA's and what the trend lines show about the historical stock price. First you need to know what MA 20, 50, and 200 are. What MA stands for is Moving Average so MA 20 means 20 day moving average. This is the average of the price of the stock for the last 20 days. This line stays very close to the real stock price and if a stock is below that. It usually means it has a downward trend and that signals 'not a good buy'. Same with the 50 day moving average and the 200 day moving average. Now what do the trends mean. It is a certain trend that people think the stock will continue to move at because the price has been going in that certain directional trend. The trends are important because they show how the stock has been moving and how it is predicted to continue to move in price.
What To Look For In The Key Components:
- MA 20 50 200: When you are looking at a chart and it has all 3 of these Moving Averages, the main one you need to be concerned about is the 50 day moving average. Reasons, the MA 20 is only giving you the short term period of the stocks movement. MA 200 is adding in prices from 200 days ago, which is almost 3/4's of a year, that usually has nothing to do with the current stock price. Why MA 50? Because it gives you a long enough period of time and it doesn't have unnecessary numbers. What to look for in the MA 50: First thing is the most obvious, you want the real price to be above the MA 50. This means that the price is growing and will probably continue to grow. How much do you want it below the price? That's the second part, you need to look at how long the stock has been growing in price. If it has been growing for 6 months then it is unrealistic to want the price to be much higher then the MA 50 (it's unrealistic to think the price will even grow at that period of time!). But if it just started growing then it hasn't had a chance to get above the MA 50 (by just started growing I mean growing from a fall.). The most realistic time period for you to think the stock should be way above the MA 50 is 30 days after a big decline in the stock. And if it is way above the MA 50 after that time period that I just stated, then it is easy to believe that the price will continue to rise and that means it is a good buy.
- Trend Lines: What do you want to see with trend lines? What trend lines are good for, is telling you when to buy. If a stock has just come off a big decline, you want the stock to be above the previous trend line, or a new trend line that says the stock is destine for a long period of growth. Now these trend lines are set up so you don't have to make them but another thing I recommend is printing out a chart of a stock for the past 6 months and putting your own trend lines in. This will show what you think the stock will do which is the most important thing of all (but if you can't figure out how to make the trend lines it's okay to use the ones already on the charts).
These 2 things are the most important symbols that you will use in your technical analysis. They give the most data out of anything else on the chart. But also you can make your predictions on bolinger bands, MACD's, and other sub charts that come with the price chart. They will show you shareholder actions, more advanced price trends, the volatility of the stock over time, etc. But for now as a new investor, the main tools you should use are the MA 50 and the Trend Lines, this is to give you an idea on technical analysis but as time goes on the analysis will get more advanced.