TRADING SHARES WITH TECHNICAL ANALYSIS
The price level of a stock drop a number of times and then bounce back up in price, this nature of stock is caused by human nature or common human reactions. It is quite interesting to watch a stock rise to a certain level each time like it is hitting a ceiling. They show up on stock charts as support and resistance levels.
The resistance level is the price at which one may expect a large increase in supply whereas support level is a price at which one may expect a huge increase in demand for a stock.
As an example if a stock trades for 2 months between 54$ and 58$ per share, the support level is 54$ and the resistance level will be 58$ per share. If the stock break out of this trading range and goes up to something like 59$, this will be called as a breakout. The savvy trader will analyze the volume on the day of breakout. The time period for which support and resistance levels stay valid vary greatly. They can even last for decades or be very short. The longer a support or resistance levels stay valid, the more reliable and significant a stock becomes.
USE OF MOVING AVERAGES TO BUY STOCKS
The moving average is a simple stock analysis technique in which average is taken over a specific period of time like 20 days, 30 minutes or 10 weeks or any period time period that trader chooses. This kind of analysis smooth’s out price data and helps to reduce the “noise” on a price chart.
If the price is above a moving average, the trend is upwards and If the price is below a moving average, the trend is downwards. So, one MA may indicate an uptrend while another MA indicate a downtrend because moving averages have different lengths.
A four-day simple moving average (SMA) adds up the four most recent daily closing prices and divides it by four to create a new average each day. Each average is connected to the next, creating the singular flowing line.
Another moving average is the exponential moving average (EMA). The calculation is comparatively more complex because it applies more weighting to the most recent prices. You will notice that the EMA reacts more quickly to price changes than the SMA does, due to the additional weighting on recent price data, if you plot a 20 day SMA and 20 day EMA on the same price chart.
No manual math is required to use a moving average as charting software and trading platforms do all the calculations.
Going with the Primary Trend
1. Look for stocks that are down strongly or breaking out
2. To see which setting is containing the best price, apply the following SMAs 5,10,20,40,200.
3. Once you identify the correct SMA, wait for the price to test the SMA successfully and look for price confirmation that the stock is resuming
4. Enter the trade on the next bar
Fade the Primary Trend Using Two Simple Moving Averages
1. Locate stocks that are down or breaking out.
2. Select any two simple moving averages to apply to the chart (ex. 20 and 40)
3. Ensure that in the last 10 bars the price has not touched the 20 SMA or 40 SMA excessively.
4. Wait for the price to close below or above both moving averages in the counter direction of the primary trend on the same bar.
5. Enter the trade on the next bar.
The simple moving average is probably the most basic form of technical analysis. A technical analyst or a trader must be careful to avoid analysis paralysis, because there are an unlimited time frames and number of averages you can choose from.
This article is written by Mr. Ankit Yadav manager of Future Wings Media that provides Share Market Course In Delhi and many other professional courses.