How to Do a Technical Analysis of Stock Trends

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Technical analysis is a way of looking at stock trends to predict what the price will do. There are hundreds of ways to use technical analysis to study markets, including: looking at chart patterns, indicators, trend lines, and moving averages.

  • Find a time frame that works for you. The first step in analyzing stocks is deciding what type of trader you would like to be. If you are completely new to this business, start off by doing "swing trading" or "position trading." This means that you will be holding your trades for several days to several weeks, maybe even for a few months if you catch a good trade. The lowest time frame you should look to make trades from is the daily chart. You should determine the trend by looking at weekly charts.

  • Determine the trend of a stock by drawing trend lines. Look at the chart and draw a straight line from the most recent low and to the next low (see resources below for visual instructions on how to draw trend lines). You also want to do this for the last high on the chart and connect it to the next high. You want the trend line to have be connected to at least three highs or three lows. After you have done this, look to see whether the slant of the lines is going up or going down. This will determine the trend.

  • Find an entry signal. Once you have determined the trend line on the weekly chart you will want to find an entry signal. This should be done on the daily chart. You can using a simple moving average crossover system for this. Moving averages are the most commonly used tool in technical analysis. They are simply an average of the prices for a given period. For example, a nine-day moving average is the average of the prices for the past nine days. For the entry signal, you can use nine-day and 18-day moving averages. So when the market is trending up on the weekly chart and the nine-day moving average line crosses above the 18-day moving average line, this will signal a "buy" entry. Likewise if you are in a weekly down trend and the nine-day average crosses below the 18-day moving average, this will give you a "sell" signal.

  • Add two more technical indicators to confirm your entry signal. Ones you might consider are the two-period RSI (relative strength indicator) and the MACD (moving average convergence divergence). These are two very easy-to-use technical indicators that, when combined with a moving average crossover, make for an effective system. When the RSI is above 90, the market is overbought and you should be looking for trade to go short. When it is below 10, the market is oversold and you should look to go long.

  • Use the MACD. The MACD consists of a simple crossover system. One of the lines is called the signal line. When the other line crosses above the signal line, this is a "buy" signal. When it crosses below the signal line, it signals "sell."

Tips & Warnings

  • Remember to first determine the trend and use both indicators and the entry signal before you take a trade. All four factors must be in alignment. Otherwise, there is no trade.

References

  • Photo Credit chart background image by Stasys Eidiejus from Fotolia.com
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