Technical analysis is the process of using stock charts to plot your strategy and timing for trading stocks. It is the opposite of fundamental analysis. Fundamental analysis is the analyzing of a company’s financial statements to determine the strategy.   There are multiple methods to use in technical analysis. Some of these are momentum analysis such as rate of change (roc), stochastic, relative strength index (rsi). Trend analysis are moving averages, moving average convergence divergence (MACD), price oscillator (PPO). Volume analysis uses Accumulation Distribution, Volume Rate of Change, Demand Index. Other analytic methods are to analyze the swings of the stock prices or use Bollinger Bands. There are many others technical analysis tools available.

When determining the analysis to use, it is important to not use the same type of analysis. This will mean that each of the analytics used will move in the same direction and give false information. Try to use indicators from different categories as detailed above.

Stochastic was developed by George C. Lane in the late 1950’s. I will not detail the math behind the tool. That can be found elsewhere. However, I did want to state how the trader would use this tool. The stochastic fluctuates between a high range of 80 and a low range of 20. When the stochastic range is above 80, it indicates a overbought situation. When it is below 20, it shows the stock as oversold. However, a trader needs to be careful. Just because the indicator is above 80 does not necessarily indicate a sell trigger. Conversely, below 20 does not mean a buy signal. Lane believed that some of the best signals were when the oscillator moved from overbought territory back below 80 and from the oversold territory back above 20. Another rule to remember is to not act on the first instance of a crossover. Wait for a second crossover to occur. For example, if the oscillator moves above 20, wait for the dip down and then when it move above 20 again, it is an indication to buy the stock.

Bollinger bands were developed by John Bollinger. They consist of three bands. There is a simple moving average band in the middle, an upper band and a lower band. The price of a stock will generally move within the upper and lower band. A double bottom buy is indicated when the price of the stock falls below the lower band and then remains above the lower band when a second low develops. The bullish scenario continues when the price of the stock moves above the middle simple average. The opposite would be true for a sell signal. Warning: Bollinger bands are not an indicator by themselves of trading action to take. They merely show the volatility of a stock. Other trend analysis is required to further confirm the signal.

Demand Index, developed by James Sibbel, combines price and volume so it becomes a leading indicator of a price change. The calculation is quite complex and will not be detailed. Some rules that apply to the demand index are:

1.  A divergence between the demand index and the price trend suggests an approaching price weakness.
2.  Higher prices with a lower demand index usually coincides with an important top.
3.  The demand index penetrates the level of zero indicating a change in trend.
4.  When the demand index stays near the level of zero for a period of time, it is an indicator of weak price movement that will not last long.
5.  A large long-term divergence between price and the demand index indicates a major top or bottom.

Swing charting is the process of evaluating the swings of the stock prices. A simple rule of thumb is to buy when the current stock price goes above the highs of the previous full 4 week period, The opposite would be true. Sell when the current price falls below the lows of the previous full 4 week periods.

Technical analytics are tools available for a trader to use. Price trends, momentum and volume analysis, supplemented with other analysis will certainly help make good purchasing or selling decisions. However, never take the analytics by themselves. This may work but it may not. You should always do some financial analysis before determining the action to take concerning a possible trade. If the financial analysis does not confirm what the technical analysis tells you, be wise and hold off on the determined action.

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Tags: stochastic, stock charts, swing charting, technical analysis, trend analysis