Technical analysis is a way to analyze securities by identifying statistical trends gathered from trading activity, such as price and volume changes. It boils down to using statistical tools that allow you to understand the ways supply and demand of a security affect things such as its price and volume. Technical analysis is often used for short-term trading signals, but it can be beneficial for long-term signals to better improve your evaluation of a security relative to the market. Technical analysis can be done on securities from all asset classes, but the focus of it for this article will be on stocks. Units of stock are called shares. As with any form of analysis, historical data is necessary to do technical analysis. There are many indicators used for technical analysis, but 4 of the key technical indicators I use are moving averages, moving average convergence divergence, Bollinger Bands, and relative strength index.
Disclaimer: I am not a financial advisor. I do not know your financial situation. I am purely sharing the information I have learned for educational purposes.
1. Moving Averages
A moving average helps to smooth out stock price action by filtering out the noise from short-term fluctuations. There are two main types of moving averages, which are simple moving average (SMA) and exponential moving average (EMA). SMA is the arithmetic mean of a given set prices over a specific number of days. EMA is the weighted average of a given set of prices over a specific number of days that gives greater levels of importance to more recent days. Moving averages are used to identify the trend direction of a company’s stock. It is also used to identify support and resistance levels of a company’s stock. Support occurs where a downtrend is expected to pause due to an increase in the concentration of demand for a company’s shares while resistance occurs when an uptrend is expected to pause due to an increase in the concentration of supply for a company’s shares.
I focus on simple moving average, specifically 200-day SMA and 50-day SMA. 200-day SMA is a key indicator of overall long-term market trends for a company. It covers roughly 40 weeks of trading. If a company’s stock is above the 200-day SMA, it is considered to be in an overall uptrend. 200-day SMA can also be a support level when a company’s stock moves above it, or a resistance level when a company’s stock moves below it. I use 50-day SMA in conjuncture with 200-day SMA to determine a golden cross or death cross.
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