Stock Investing 101: A Primer To Technical Analysis

The act of saving and investing money regularly will significantly change the way you live your life in the future

       ​Risk comes from not knowing
what you are doing.

- Warren Buffett

An investor's worst enemy is not the stock market but his own emotions. The key to making money in stocks is not to get scared out of them. 

Outline

• What is Technical Analysis
• Spotting and Following Trends
• Understanding Corrections and Area Patterns
• Technical Indicators
• Putting it all Together

What Is Technical Analysis?

The Need For Timing

Markets come with volatility!

• ​Due to human influences (logical, illogical and emotional)
• Traders are short to medium term investors who wish to capitalize on such trend swings
• But how high or high low will a price move go? How durable will a trend be? When does a trend end? = TIMING

Technical Analysis is the study of price movement of any type of security pictured into a graph or chart for the purpose of spotting and following price trends.

The Study Of Price

Price discounts everything​

The market price tells you everything you need to know about a stock's expectations.

Prices move in trends

An object in motion tends to stay in motion while an object at rest tends to stay at rest.

History repeats itself

People will tend to react in similar fashion to certain kinds of stimuli grooming repettitive patterns of price activity.

Looking At Prices Thru Graphs

Open - the first price a stocks trades at
High - the highest price it reaches in a trading day
Low - the lowest price is tags during a trading day
Close - the final trading price of the day

Bar Chart

Candlestick Chart

Advantages of looking at graphs/charts

• See and analyze information fast
• Spot trend movements and changes
• Scope cut and study many possible instruments (indices, stocks, bonds, commodities, currencies)

​Studying Volume With Graphs

Volume - measures the number of shares or value of those shares that trade in a day.

• It helps describes a trends following or the lack of it.
• Volume usually expands along with a trend.
• It drowns away when trends are weak and falling.

Spotting And Following Trends

Support And Resistance

Support is a price point underneath a market that shows heaviness in buying sufficient enough to prevent prices from falling down.

Resistance is a price point above a market that shows heaviness in selling sufficient enough to prevent prices from rising up.

Trade Idea: Buy near support and Sell close to resistance.

​Identifying Trends

​​Trends are durable swings in market condition; they show the general direction of a securities' price over time.

Trendlines

Trendlines are guidelines that follow a trend that connect several areas of support or resistance to project buying or selling action over time.

Up Trendlines are drawn by connecting major lows or support areas.
Down Trendlines are drawn by connecting major highs or resistance areas.
Sideways Trends are drawn by connecting resistance points and by connecting support points.

Trendline Periods

​​State your time period:

• Short Term (from 3-6 months)
• Medium Term (6-9 months)
• Long Term  (9+ months)

(Decide your term then loo at data within that time frame.)

Trendlines In Action

Strategy:

• Buy (closer to pullbacks to support of an up trendline or a breach of a down trendline.)
• Hold (as long as your trendlines do not break.)
• Sell (when your up trendline breaks.)​

Strategy:

• Buy (after a down trendline break (but wait for higher-highs to confirm your buy in plan))
  
• Hold (as long as your trendlines do not break (buy more when trendline attempts hold))​

​Understanding Corrections And Area Patterns

Bull and Bear Cycle

Market's Self-Correcting Action

Remember that "it takes time to move a price a certain distance" ...any exaggeration must be paid for by an adjustment in time or price.​

Demonstrating Corrections

Extended prices will be 'fixed' by market forces.

• Prices must follow demand/supply rules.
• Extravagant swings are fixed through corrections.

Overbought

• Too much upside... too quickly

Oversold

• Too much downside... too quickly​

Area Patterns

• Consolidations are depicted by sideways moving markets.
• These temporary consolidation shifts can also be called 'area patterns.'

Push out of a consolidation/pattern:

Breakout a condition where prices push themselves above a pattern's resistance commanding a "Buy"
Breakdown a condition where prices push themselves below a pattern's support commanding a "Sell"

Shape can unravel clues to its directional bias. Studying the various shapes of consolidations can aid in exposing who is wining the battle between buyers and sellers.

Size can tell us the eventual target to which a price could go after a breakout (or breakdown) scenario.

• Height of the pattern can project the minimum size of a push measured from its breakout point.
  
• Length of a pattern can attest to its durability and forcefulness of its move.

Types Of Area Patterns

​Continuation Patterns

Reversal Patterns

Using Patterns And Volume In Graphs

Systems Trading: Technical Indicators

A Technical Indicator is a study of price data derived from various statistical formula plotted onto a graph.

It serves three basic functions:

To Alert
To Confirm    }  Consequential Price Movements
To Predict

Three most popular indicators:

• Moving Averages (MAs)
• The MACD
• Relative Strength Indicator (RSI)

Moving Averages

A price-average line plotted onto a chart in direct reference to market price.

It can be used to:

• Identify trends in various time frames.
• Identify support and resistance.
• Qualify strength of trends.

Use:
​

• Use MAs like a trendline.
• Buy into pullbacks into it as long as it does not break.
• Sell when your MAs break.
• Crossover of shorter MA or longer term MA tells you greater trend move coming.

MACD (Moving Average Convergence Divergence)

A lagging but effective momentum tool that uses a crossover system to justify changes in periodic trends.

It has three component lines:

• MACD
• Signal Line
• Zero Line

Use:

A Buy signal is followed when:

• MACD crosses above signal line and
  
• MACD is positive (above 0-line showing a positve trend)

A Sell or take profits when MACD crosses below the Signal Line.

RSI (Relative Strength Index)

A momentum-oscillator that swings from Overbought and Oversold conditions to highlight extreme ends of a price move.

It can also spot out Bullish or Bearish Divergence.

A Divergence is a lapse in strength shown in the RSI compared with its Price.
i.e in an uptrend, a higher-high in price compared with a lower-high in RSI shows a lapse in bullish force.

Putting All Together

​Work On Your Own Trade Routine

Creating a Trading Plan
​
Practice the discipline technically evaluating your prospect - know your upsides and downsides and plan your action ahead of the trade.

• Look for a Justified Entry.
• Estimate your Targets for Profit Taking.
• Establish your Selling Stops.
• Estimating your Technical Risk-Reward.

​A Justified Entry: Trade Filtering

Estimate Your Targets

Looking for Price Targets

Evaluate what your upsides can be by following these technical methods:
​

• Trendline Projection.
• Range in a Price Channel.
• Height of its current Area Pattern.
• Distance to its next major Resistance/Support.

Establish Your Selling Stops

Triggered Exits using Support Stops:
​

• Breakdown conditions
• Trendline (or Moving Average) breaks
• Trailing stops (Last reaction lows and Short term support)​

Establish Your Risk Vs. Reward

Evaluate your prospects

A key component in being a successful trader is to determine your risk versus reward level and use that optimum ratio to guide your investment decisions.
​

• Estimate your upsides and downsides then pick out Risk-Reward opportunities of 1:3+.
• Remember selling too soon may inhibit your ratio - keep yourself with the trend.
• You now have a trade plan - be disciplined enough to follow it!

Knowledge born from actual experience
​is the answer to why one profits;
lack of it is the reason one loses...

Gerald M. Loeb