How to Use Technical Indicators for Stock
Using several indicators in conjunction gives confidence of future price movement since a single indicator can give false signals. Volume data identifies trend reversal and sudden interest in a security. Moving Averages, Parabolic Stop and Reverse (PSAR) points, and Bollinger Bands are constructions based on stock price data that help pinpoint optimal buy/sell points. Candlestick patterns provide day-to-day snapshots of open/closing and high/low price data that are read as patterns signaling trend confirmations or reversals.
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Things You'll Need
- Electronic stock screening tool
- Charts with interactive technical indicators
- Textbooks or references with detailed technical indicator explanations
Instructions
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Practical Indicator Overview
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Examine whether moving averages of different time periods (such as 20, 50, and 100 days) intersect to spot a trend in price movement. Such crossovers typically indicate a reversal in price trends, signaling good selling/buying opportunities, respectively.
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Remember that volume is the amount of shares exchanged in buy-sell transactions. "Volume precedes price" is a common guide. A prior bearish (downward) price trend is likely to result in undervalued stock; a volume spike could be due to many shares bought at bargain prices, or that an institutional investor(s) have decided the stock is worthless and are cutting their losses. Volume serves as a good early alarm of increase in stock supply or demand. Other indicators can specify which direction stock price is likely to take.
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Use Bollinger Bands to spot oversold or overbought securities. When security price is near or above the upper Bollinger Band, it is considered overpriced and will very likely come down in the short term. Similarly, if a security price is below or at the lower Bollinger Band, it is available at a bargain and will very likely rise.
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Optimize buying and selling decisions using candlestick patterns. Candlestick signals are indicative of day-to-day price trends, and provide information on range between opening/closing and high/low prices of past days. Candlesticks show detailed daily price data other indicators mentioned here do not. Volume, moving averages, Bollinger Bands, and other indicators should be considered before acting on candlestick patterns.
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Sell if PSAR points above candlesticks are nearing price ranges of candlesticks during an uptrend. PSARs signal the end of a price increase, pointing out likely maximum gains of that trend. Similarly, when stock price decreases, PSAR points line up below the candlestick price ranges. Buy when the PSAR points start to get within lower price range of the stock in question; it is likely that prices will increase in the short term.
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Tips & Warnings
Generally, price is observed to "bounce" between the upper and lower Bollinger Bands. Similar oscillating behavior can be observed with respect to PSARs.
There are other indicators to consider when making buy/sell decisions in the stock market. Money Flow Index, MACD, fast/slow stochaics, and others can all be useful to a skilled trader.
Taxes on gains and broker fees/commissions work against you. Keep such fees in mind when calculating potential profit for a given risk.
Percent lost is a greater dollar amount than the same percent gained. For example, $1000 falling by ten percent gives $900. The $900 gaining 10 percent gives $990, less than the initial investment.
