Explaining Technical Analysis Indicators

Using The Best Technical Indicators

chart a stock trend

Technical indicators are placed on stock charts to help you understand what is going on with the trend of a stock. They are either overlayed directly on top of a stock chart or are placed directly above or below the chart. They are mathematic computations using the price data points of a stock.

The chart itself of course is a plot of the stock prices and often is a series of volatile up and down moves that may not make a lot of sense at first glance to the person new to the technical analysis of stock trends. Many of the various indicators are used to help you smooth out these moves so you can easily recognize the overall trend price.

The long-term 200-day moving average is the best technical analysis indicator to use to do this - and the most commonly one used.

It is computed by totaling up the price plots of a stock and then dividing them by the sum total of the price plots. The resulting number is the average of the price during that time.

USING THE 200-DAY MOVING AVERAGE

So the 200-day moving average is the average price of the stock over 200-days. It allows you to quickly engage in trend analysis of a stock with one glance.

When a stock is in a long-term uptrend the 200-day moving average is rising in an upward slope and when it is in a bear trend the opposite is happening.

Generally speaking stocks, markets, and exchange traded funds below their 200-day moving average are in powerful bear trends and should be avoided.

Market timers often use moves below the moving average to signal the start of a bear market. A market will often hit this moving average once or twice a year in a bull market to make for a powerful support area to make new buys and investments in, but if it falls below it and stays below it for several weeks that can be a huge warning that a real bear market is in place.

For example this happened to the S&P 500 in 2007.



After a big bear market the 200-day moving average often will flatten out and go sideways for severals before it turns up to start a new bull market. This is call a stage one base.


You can apply this concept right now to do a gold technical analysis and see this happening.


This would suggest that gold will go into a bull market next year. If it does its 200-day moving average will start to slop up and will act as a support level going forward.

Now there are a lot of books on technical analysis you can read to learn more. I wrote one myself titled Strategic Stock Trading that has been a top seller on Amazon.com for years.

I also run a private high dollar mastermind group that meets to apply these concepts together and make free posts and updates on this website.

I have too much material to share with you in one article and it's easy to get overwhelmed with all of the information out there, but let me narrow things down for you.

The best way to use technical indicators is to just use a few of them. The moving average is a basic one that everyone should use. After that you only need to use one or two more.

People often fall into the trap of thinking if they can find some key combination of indicators that will enable them to predict the future.

That isn't really the best way to use them. What you really need to use them for is to grasp the current trend of a stock and then adjust when it changes. That's all you need to do to make money in the market. You don't need to predict the future.

There are basically two kinds of indicators. You have trend gauges which help you identify the overall trend, which is what the moving average is. They can't really predict anything. Instead they help you know when something has changed - which is critically important, because people usually invest holding something without a thought to a trend change and then lose tons of money by holding too long in a bear trend.

LEADING INDICATORS

Then you have what are called oscillating indicators, which are used to try to forecast a change in the momentum of a trend.

They may look at how fast a price is moving up or down and to detect a change in the speed of that trend, which often can foretell a change in the overall trend.

One of the most popular indicators to do this that I use a lot are the 20 day Bollinger Bands, which measure volatility contraction and expansion in a price plot.

Some people also use them for buy and sell signals for tops and bottoms.

Bear markets for example often come to an end with a big acceleration in the downward momentum of a trend. This even happens with short-term price moves on an hourly chart.

They can also be used to see if the price movement has reached an "oversold" or "overbought" condition - in other words has it run too far ahead of itself that a breather, for at least the short-term is likely.

The MACD and Stochastics indicators are the most commonly used oscillator.

I use the latter one as it's easy to read on a chart. The idea behind it is that in a powerful uptrend prices will tend to close at the top of a trading range and once the trend matures and gets close to ending the prices will close away from the top as momentum starts to falter.

Stochastics above 80 signal overbought conditions and a sell signal is generated when they then fall back below 80. For bottoms the 20 level is the one closely watched.

Stochastics will generate multiple sell signals throughout a bull market and simply signal short-term breathers and corrections. They aren't really useful for calling big trend changes, but instead are good to use to make buy points in a market after corrections take place, and vice versa in a bear market.

Here is a chart using them. They are plotted out in the box above the price chart.


Now I also combine these indicators with relative strength investing strategies to try to buy into emerging stock market leaders.

I have been an active trader in the markets now since the 1990's and have found one chart pattern to be the most profitable. I call it the Two Fold Formula and I have a free technical analysis PDF that I have written about it for you.

To get it just become a free member of this site. You'll then receive regular actionable investment ideas to help you apply these concepts to real world and not just engage in theorizing.

Begin by clicking here.

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