Providing investor education, product enhancements and software solutions on how to become a more successful online trader with The Investrio Mentor Center. Understanding the Stock Market The purpose of today's column is to provide you with invaluable insights into the Stock Market. Today’s Topic: TECHNICAL ANALYSIS SOFTWARE SUMMARY In weeks past, we have discussed the four major indicators you should be using to determine entry and exit points. They are the technical indicators (stochastic and MACD), trend, moving averages and volume. Today we will discuss combining all four of these to determine potential investment opportunities. In using these indicators you must understand that all four should be in accordance with each other; in other words they should all be doing what we have discussed in the past articles at the same time. This is similar to driving a car - it is a lot easier to do it with four wheels. If one is flat you can still drive, but it sure makes it more difficult! Let’s talk about how these indicators work together and show some examples of this occurring. The first indicator that we always talk about is the trend. If we are going long on our position - in other words we want to make money as the stock goes up - make sure that the overall trend supports that. Make sure that each low is higher than the previous overall low and that the stock is creating new highs. The opposite applies if you go short, meaning you hope to make money as the stock goes down. The next supporting indicator is the moving average. Try to have your trend play above the moving average and have that 20-day average play as a support line. In the example illustrated, you can see that the 20-day moving average or blue line acts as support each time the stock rises above and then falls down to it. There were only a couple of times that the stock ever broke below the 20-day moving average. The next indicator is the volume. This is the amount of shares of a stock bought and sold on a particular day. The red bars indicate a loss in price, or negative volume. The black bars indicate a price gain, or positive volume. The higher the bar, the more volume was exchanged. Again look at the above example. If you look at Aug 12, you will see the volume reached a value of almost 1.8 million shares. The volume is similar to the volume you find on your radio. The louder or higher it gets, the more attention it should bring. So find areas where the stock is bouncing off of a support (i.e. the 20-day moving average or an actual area of support at a certain price), and when you find these areas look for strong volume. To help you determine whether volume is high or not, there is a pink 60 day moving average that runs parallel to the volume indicator. If the volume is at that moving average or above it, this indicates high volume for the day. A strong indication of high volume is when the bar is above the moving average by 50% or more. This indicates that there was twice the normal volume for the past 60 days. Let’s bring this all together by looking at the chart above. You will see a bounce off the moving average by the price action, a good upward overall trend, and high positive volume. Your last supporting indications are the technical indicators, stochastics and MACD. Our last two articles have discussed how to read these so we won’t go into extensive detail (click here to find previous articles) , but let’s discuss their application in congruence with volume, trend and support/ resistance. When using both stochastics and MACD, you wait for a crossover in their two moving average lines. For the MACD, you wait for its black line to cross up through its blue line; for stochastics, you wait for the black line to cross up through its red line. Ideally you want both to occur at the same time on good volume, trend and support/resistance but the stochastics typically cross slightly earlier. So to be conservative, wait until the MACD has crossed up as well. With stochastics you are determining what the sentiment is doing and with the MACD you are determining what the momentum and trend will be. By combining those two with trend, volume and support/resistance you are riding on all four wheels. You have four areas of support that can really strengthen your positions and give you great opportunity for entry and exit points. This has been a basic overview of technical analysis. I strongly urge you to apply these principles to stocks that are currently in your portfolio and see how you do (in other words PAPER TRADE). Technical analysis is a powerful tool that can give you great potential investing opportunities. You can learn how to manage your own money & your investing. Think about it, who really cares about your money more than you do anyway? You can test drive The Mentor Center absolutely 100% Risk Free 10-Day Trial! START INCREASING YOUR KNOWLEDGE & RETURNS TODAY. Click Here Thank you again, for the opportunity to share our knowledge and experience with you. “More Millionaires have been created from the stock market than any other source” --Bloomberg Magazine Copyright © 2000-2003 Wall Street Mentors Inc. All Rights Reserved. Member Access |
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