Technical Analysis and Chart Setup
To begin this learning experience, I should pre-face that I while have studied these topics a bit in the past, I am by no means an expert and don’t want to be one. I am a kid trying to learn this new profession; this job. Read with a skeptical mind and feel free to point out anything incorrect.
I think the first lesson for me to understand is the time commitment. This is a job and I need to temper my expectations that I’ll have it all figured out in one month, 12 months, or three years. I’ll always be learning and I’m grateful for that, but I hope I can trade the right amount of “time” to earn a large amount of money.
When trading, and identifying which stocks to trade, I should act as a lawyer. Each stock deserves it’s on case; it’s own set of research and investment in time and mental energy. Take the time to read the charts and build a case for why I should invest my money into Facebook for example.
Price and Volume
Price alone should tell me when to enter or exit a stock. Period. (I would like to get the point of understanding price movements well enough that I can look at a chart without any indicators.)
Volume also contributes to when a stock is ready to be purchased (or shorted). Relative volume is especially important. It means how does volume for this day compare to yesterday, or over the past week.
Volume can also tell us who is in control of the stock. For example, during accumulation, buyers are in control. This is usually indicated with strong green volume days that are able to swallow periods of pullbacks. On the flip side is distribution, when the sellers are in control.
Learning technical analysis and being able to read charts to confirm price triggers. I use three different indicators:
- Simple Moving Average
- Bollinger Bands
Simple Moving Average
I add three moving averages to my charts, but first let me explain what moving average’s. A moving average takes the relationship of price over time — that is my understand at least. Here is the technical defintion: “calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods.”
- 20 period moving average — this is your short term movements
- 50 period moving average — intermediate movement
- 200 period moving average — long-term movement (for longer-term trading)
These three lines overlapping my charts help me do two things:
- Identify Trends
- Identify areas of support and resistance.
The Stochastic’s indicator shows extreme price movements of being overbought or oversold.
When the line crosses below the 20 threshold, this indicates oversold conditions. Put more simply, it means there has been too much selling and it is reasonable to expect a bounce.
When the line crosses above the 80 threshold, this indicates overbought conditions. Conversely, this shows signs that a pullback could take place.
Bollinger Bands act as a rubber band measuring the range of price over time. When price extends either below or above the range, it is reasonable to expect a price correction and move back closer to the mean.
There is a lot more to stock trading than this, but for me this is a good foundation. It explains how I can setup, read, and interpret a stock’s chart. I come from a value-investing mindset, so seeing a chart and understanding all the different lines and bars was difficult. This, hopefully, can help solve some of that mess for me.
Things to keep in mind:
- Indicators serve as support to price. Don’t rely on one indicator to tell me to position myself in a stock.
- Play around with different software and setups. What is the easiest and user-friendly software that I can use and understand.
- Trade with the trend. Don’t try to be a hero and go against the grain. Join the crowd!
- I only have to be right about half of the time, but the half I am right is when I make way more money than I lose.
- This is a job. Just like being a doctor, lawyer, or accountant, I should respect the time commitment that entails.