Are you trying to get more into investing? If so, you’ve come to the right series. We’re all about making sure that you can really sink your teeth into better investing, without all of the jargon. We try to explain it in a way that lets everyone become an investor. That’s the point of investing, you know — to elevate your life. If you’re still just spinning your wheels, don’t get depressed. A lot of people assume that investing is complicated, but it doesn’t have to be that way.
Today we wanted to talk about technical analysis, a powerful tool that can let you pick better stocks without guesswork. Sure, a lot of people tend to pick stocks based on how they feel about the CEO or what they feel the company is actually going to do. That’s not the way that you really want to pick stocks. It makes a lot more sense to think through things from logic, numbers, and reason. Emotion only gets you so far, and there are plenty of people that trade on sentiment. You need to figure out what you want to trade on. We recommend logic, naturally, but there will be some emotion mixed in there.
Technical analysis isn’t anything complicated. It’s just the predications around the future prices of stocks based on what’s happened in the past. You don’t get a clear and 100% accurate picture, but you get a good idea of what’s likely to happen. It’s all about price over time.
It’s not just about stocks — it’s really about any instrument where supply and demand will come into play. And it’s not just a flat price, either. It’s about the open price, the high price, the low price, or the closing price over a SPECIFIC time frame. It’s the specific part that usually gets people confused about what’s really supposed to happen.
If you want to be serious about time frame, you need to figure out the difference between 1-minute, 5-minute, 10-minute, 15-minute, 30-minutes or even hourly. There’s also the daily, weekly, and monthly price data. Some technical analysis people tend to even go back years just to make their theories stick.
Charles Dow is seen as the father of the modern technical analysis movement and he believed that price was a massive indicator of what’s going on in the market. The current price reflects all of the information of ALL participants. This is actually a longer list of people than you might imagine: everyone from investors and traders all the way up to market strategists and reports as well as technical analysts themselves. TA’s want to build a view on the future, whatever future that may be.
There are going to be points where prices don’t trend at all. The concept of price movements being random has been discarded a long time ago. If something was truly random, then you would never be able to get any clear information about it, would you?
If you’re going to look at doing technical analysis on your own, you are going to need a few things.
The first would have to be purpose. Do you want to look at bullish situations? If so, you’ll want to keep that goal on top of everything else.
As an aside, make sure that you’re looking carefully at what’s really going on. You want to make sure that your time frame is large enough for you to really see any price movements.
Support and resistance levels will be very important as well. You want to make sure that you are watching for these things, as they tell when supply and demand are actually locked against each other. If the prices move out of the trading range, then you know that either supply or demand has the upper hand.
Keep in mind that technical analysis will never tell you the whole story, but it can come pretty close. You’ll have to also study the overall market sentiment to see what your next move should be. Still, using all of your tools to best advantage will go a long way in making sure that you can capture gains over a long period of time — just like the big investors do!