How Is Technical Analysis Used for Picking Stocks?

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How Is Technical Analysis Used for Picking Stocks?

Technical analysts use three different types of charts to track stock prices. Line charts track the daily movements of closing prices. Bar charts show the highs and lows of stock prices over time. A point chart lists a price only when it changes by a predetermined amount, such as one point. Point charts are used to determine a stock’s momentum.

Things To Know

  • Investors use trend lines to try to predict the next stock price.
  • Investors combine price indicators to determine when to trade.
  • Various market indicators can predict the trend of the market.

Trend lines

Investors use trend lines from these charts to try to predict the next stock price. After establishing a stock’s trend, the investor compares the current price of the stock to its historical trading range. Most stocks trade within a set range. The bottom of the range is the stock’s support level, and the top is its resistance level. The price of the stock usually continues in the same direction until it reaches one of these two unsustainable levels. When it hits the support level, its price turns around and starts to climb, making it time to consider selling. When it hits the resistance level, it starts to drop and it’s time to consider buying.

Price indicators

Investors also combine price indicators to determine when to buy and sell. When a stock’s price line falls below the market moving average, an investor might advocate selling. If the price line is above the moving average, it might be a good time to buy.

Market indicators

Analysts can also predict the trend of the overall market through market indicators. A sentiment indicator focuses on investor expectations. The market will generally move in the opposite direction of investor expectations. Momentum indicators also give analysts the information they need to attempt to predict market trends. These usually consist of price/volume indicators applied to market indices.

Investors can use an indicator called relative strength to pick out successful stocks. Relative strength divides the price of a stock by its market price index. A resulting upward sloping line means the stock is outperforming the market and vice versa. Relative strength can also be used to pick out entire industry sectors.