Technical Analysis 101: Three Great Technical Tools

When it comes to technical analysis, it’s very easy to become overwhelmed with the shear number of indicators.  Everything from Bollinger Bands and MACD, to moving averages and accumulation/distribution lines can make even the most seasoned pros a bit cross-eyed and batty after awhile.

However, with practice, it’s becomes easier.

So far, we’ve talked a lot about Bollinger Bands, MACD, candlestick patterns, Parabolic SAR, relative strength (RSI) and even Williams’ %R.  Here are some other easy ones to understand along the way, too.

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No.1 -- Simple Moving Average (SMA)

The simple moving average (SMA) gives you the daily average of the last x number of days. Many traders seem to rely on the 20-day, 50-day and 200-day moving averages the most and are used as support and resistance lines.  Crossovers of such moving averages can also tell us when it’s a good time to buy or even sell along the way.  There are variations on such moving averages, but these simple three typically suffice. 

For example, if the 50-day moves above the 200-day moving average, we have a golden cross, or a bullish signal for a higher price.  Or, let’s say the 50-day drops below the 200-day.  In this case, we have a death cross, or a bearish signal.

Or, if we’re trying to identity a long-term trend, a moving average can show us support.

No. 2 -- Accumulation/Distribution Line (A/D Line)

When the A/D line is a momentum indicator that is associated with changes in both price and volume.  It’s based on the idea that the more volume that accompanies a move in the stock itself, the more significant the move.  Divergences in the A/D line and the stock can tell us a change in direction of stock price may be imminent.  For example, if the price of the stock is moving higher, but the A/D line is moving lower, it can imply the direction of the stock may soon shift lower.

When both the price of stock and A/D are making higher highs, the uptrend is likely to continue.  When both the price of the stock and A/D are making lower lows, the downtrend is likely to continue.  When the price of the stock makes new highs and the A/D fails to do so, too, the uptrend could soon fail.  That’s known as negative divergence.

When the price of the stock makes new lows and the A/D doesn’t follow suit, the downtrend may soon peter out and reverse.  This is known as positive divergence.

No.3 -- You

What do I mean when I refer to you?

Of all the technical tools I can share with you, the most reliable tool of them all is you and your own eyes.  If you’ve seen a pattern you’ve seen before and are comfortable with it, use it.  Sometimes you may see something that 20 other people may not. 

Your own experience and what you see can be the most powerful.  Remember, technical analysis is simply trying to figure out how to judge a future price movement based on information you see in the past.  You might not seem like an essential technical tool, but you can’t get stuck just looking for patterns from a book.  Not all stocks will ever trade the same way so you’re personal insight may be a better guide.

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Learn Simple, High Probability Setups from Pro Traders. Prove Your 
Mastery of Their Strategies and Get Paid To Trade! Learn How Here

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