Stock Charts: Using Technical Indicators

Stock traders use technical indicators to help make the best decisions for buying and selling stocks. By using technical indicators, you have a higher probability of entering or exiting a stock trade with the best possible stock price. There are so many technical indicators to choose from, that some people get overwhelmed in deciding which indicators to use. The best way to determine which indicators to use is to start with basic technical indicators and build from there depending on your trading style. Work to keep your stock charts as simple as possible to prevent mental overload. If you later decide to try out another indicator, add it to your stock charts and practice using it for some time. That way you can see if it increases higher profit percentages. If it does not add any positive value to your stock trading, remove it and move on to another or continue using the indicators that you have already proven.

Technical indicators are signals that produce buy and sell signals that are based on past prices, current prices and volume. These are mathematical calculations that are made within the indicators and produce a line of your choosing on your stock chart making it easy to read and interpret what it is telling you. When you use these technical indicators, you are actually making a decision based on historical patterns, what the stock price will do in the near future. It is important to realize, these indicators will not give you the absolute “buy here” and “sell here” signals; you have to be able to interpret what the indicators are telling you and decide at what price is the best place to enter and or exit a stock position. It may take some time to learn how to interpret these signals, and use them according to your own stock trading techniques, but once you do, you will see increased profits.

In addition, you should look for technical indicators that work well together providing you with the best information possible. Some examples of this are, moving averages, stochastics, and support and resistance.

Moving averages are widely used because they help minimize the noise or breathing that stock prices experience in price movement. They also help to determine a change in the trend and create a clearer picture of how to better analyze that stock chart and execute the stock trade. The simple moving average is calculated using the closing price and a specific number of time periods. In other words, simple moving average is the average stock price over a specific time period. Shorter-term averages naturally respond quicker than longer-term averages. Some stock traders watch for the shorter term moving averages to cross the faster term moving averages to tell when a change in trend is beginning.  As the shorter-term moving averages begin to cross over the longer-term moving average, they begin acting as an area of support as the price of the stock pulls back a little.

An exponential moving average is similar to a simple moving average but it is faster than the simple moving average by reacting faster to price changes. While you can use any time frame for moving averages, the most popular are often 15, 20, 50, and 200 moving averages. It is best to use each of these moving averages or a combination of them to help determine which ones work best for your style of stock trading.

Another commonly used technical indicator is stochastics. The main thing to watch for in stochastics is when it approaches the upper or lower areas between the 80 and 20 values. As it approaches the highest levels, begin watching for a short. As the line begins to turn over, it is your first signal to sell or short. Just the opposite is true for a buy signal. As the line reaches the very bottom of the channel and it begins to turn up, you look for the best price to buy the stock. One thing to be aware of while watching stochastics is the volume. The probability of a winning stock trade is higher when there is a larger amount of volume present.  
Support and resistance are also widely used indicators. Support levels are a price level that a stock has difficulty falling below. Resistance levels are a price level that a stock has difficulty moving above. An area of support represents a previous low and areas of resistance represent a previous high. Areas of support are at the most recent area where the stock price had moved down and bounced at a specific price area known as support. When the stock price gets close to this area of support again, it is highly probable that it will bounce off that support and move higher. Just the opposite is true for resistance. As the price of the stock moves higher to the previous area of resistance, it is probable to hit that area and move down again. Each stock is different and sometimes they break through areas of support and resistance and reverse their intended roles. This is especially true on highly bullish or highly bearish days. It is important to watch for support and resistance levels on the one-minute, three-minute and the daily charts.

Start by using basic technical indicators and see if they work to increase your profits. You can always add, remove, or edit these indicators; nothing is permanent. Just remember to keep it simple as too much information produced by too many indicators can cause confusion. By using technical indicators along with price movement and volume, it creates a clearer picture, through a chart pattern, providing you with more precise information of how to execute a winning stock trade. With the help of technical indicators, you should see your stock trading skills and profits soar.

TradeStocksAmerica Staff

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