How to utilize Technical Analysis to build informed investing decisions:

Introduction:

As the process of buying stocks have become easier, people are no longer doing the technical research when building a portfolio. Investing decisions are more based on emotion, rather than analysis. Let’s discuss what a stock is, review a few key terms and look at a few signals that could be watched to help build informed decisions when investing your hard-earned money.

What is a Stock?

Stocks are generally known as shares or equity of a company. When you invest into a stock it represents a partial ownership of the corporation. Prices of stocks generally fluctuate daily, driven by expectations on the company’s earnings and recent media press. Historically, doing market research and investing in high-quality companies can generate profits over the holding term. It can be beneficial for your portfolio to hold stocks as it can diversify your money, if the business is succeeding, you are succeeding.

Stock Market Terminology:

When looking into companies to invest in there are many different terms that you may see. Investing can come off as challenging, or overwhelming when looking at companies. Here are a few definitions that can hold value when looking to invest into a company:

·      Market Cap – This is the total valuation of all outstanding shares of a corporation in relation to the share price. (1,000,000 Shares at $25 share price = 25,000,000 Market Capitalization.

·      P/E Ratio – Price to earnings ratio is the way to compare the stock price to its earnings. (Share Price / companies earnings per share)

·      Earnings Per Share – Earnings per share is the formula that measures a company’s profitability. This indicates how much profit that each outstanding share of the stock has produced. ((net income – dividend payments) / shares outstanding)

·      Dividend – A dividend is a kickback from earnings, often quarterly, that corporations pay to their shareholders. Majority of the time a dividend is offered in cash or stock reinvestment.

·      Trading Volume – Trading volume measures the total number of stocks exchanged during a time. Volume swings can be used to dictate the total amount of ‘action’ that is getting processes behind a stock.

·      Sales / Revenue – Sales Revenue is the income taken by a corporation from its services / goods. Sales and Revenue are often described as the same thing in the trading world.

·      Net Income – Net income is the amount of earnings after the cost of goods sold, expenses, taxes and loan interest. Net income is a powerful stat to evaluate to see if a company is succeeding and trending in the correct direction.

Easy enough, right? Now that we have the definitions of the core terms that you may see about a stock. Let’s discuss how we can evaluate these pieces of information to help make informed decisions when investing in a stock.

Signals to help build informed purchasing decisions.

There are many ways that technical analysis can be used for building informed decisions when investing in stocks. Here are a few different decisions for the everyday investor: 

1. Chart Patterns

- Historical Charts: Most brokerages offer historical charts when you look at a stock. Expanding the chart to look at 1 year, or 5 years can be beneficial to look at. If the stock has a negative / positive return over the timeframe that could be an indicator about the future when building expectations of the stock over the long term.

- Patterns: Look for repeating patterns such as:

- Heads and Shoulders – Head and shoulders patterns will have 3 distinctive bounces up. The first and third bounces up will have a similar gain. The middle, or second, bounce up will be generally higher. This indicates a bullish future is ahead with the stock.

- Double Tops and Bottoms – Double tops and bottoms will form as an M or W, respectively. When the stock forms an M trend, meaning that the price peaks up, then trends down and up again. This most likely is going to alert for a bullish outcome. Vice versa with the W form, if you see the stock push up down then back up, it could signal a bullish outcome. 

-Triangles – Triangles can come in many different patterns. We will cover Ascending, Descending and Symmetrical. Ascending triangles will test the same resistance high a few times with shortened lows. This could indicate a bullish outcome. A descending triangle will test the same low multiple times with lower highs, this indicates a bullish outcome. Symmetrical triangles will test in a symmetrical approach with different highs and lows in a triangle approach. This normally indicates a bullish outcome.

-Support and Resistance Levels: Many stocks will find support levels when the price is trending down. You can find a support level by looking at a historical chart of the stock and looking for lows where the stock continues to bounce back. 

Stocks will also have a resistance level on the way up. Like the support level, find prices where the stock continues to test and resist back down. 

2. Technical Indicators

-Moving Averages - Use simple moving averages (SMA) or exponential moving averages (EMA) to smooth out price data and identify trends. Common periods are 50-day and 200-day moving averages.

- Relative Strength Index (RSI) - Measures the speed and change of price movements. An RSI above 70 indicates overbought conditions, while below 30 indicates oversold conditions.

- Moving Average Convergence Divergence (MACD) 

Shows the relationship between two moving averages of a stock's price. Look for crossovers, divergences, and rapid rises/falls.

3. Volume Analysis

• Volume Trends: Analyzing volume alongside price movements helps to confirm the strength of a trend. High volume on price increases suggests strong bullish sentiment, while high volume on price decreases suggests strong bearish sentiment.

• Volume Indicators: On-balance volume (OBV) and the Volume Price Trend (VPT) indicator can provide insights into the buying and selling pressure.

4. Trend Analysis

• Trend Lines: Draw trend lines to identify the direction of the market. Upward trend lines are drawn along the bottom of easily identifiable support areas, while downward trend lines are drawn along the top of resistance areas.

• Channels: Identify price channels where the stock is trading within an upper and lower boundary. Channels can be ascending, descending, or horizontal.

• Bollinger Bands: These consist of a middle band (usually a moving average) and two outer bands that represent standard deviations. Bollinger Bands help to identify volatility and potential overbought or oversold conditions.

There are many different approaches that the everyday investor can utilize to purchase stocks. Everyone’s investment journey is different, you need to find you niche that suits yourself the best. We hope this article helps you find success on your investment journey.

The investment recommendations provided by Ward Wire are for informational purposes only and should not be construed as financial advice.