Lesson #7 – Basic Technical Analysis you Must Learn
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Subscriber, Lesson #7 – Basic Technical Analysis
Normal false EN-AU MicrosoftInternetExplorer4 Normal false EN-AU MicrosoftInternetExplorer4 Normal false EN-AU MicrosoftInternetExplorer4 /* Style Definitions */ /* Style Definitions */ /* Style Definitions */ Normal false EN-AU MicrosoftInternetExplorer4 Normal false EN-AU MicrosoftInternetExplorer4 Normal false EN-AU MicrosoftInternetExplorer4 Technical analysis deals with the price and volume of a stock, and looks at trends, patterns and indicators. This differs from fundamental analysis, used mainly be value investors, which looks solely at the company’s balance sheet, earnings, management and anything else related to the company itself.
Technical analysis is, in some respects, a self fulfilling prophecy in that the more people believe in it and use it, the more they act on it, and the more profound its effect – thereby becoming true.
Nevertheless, we need to understand the basics of technical analysis in order to determine a good risk/reward trade and help identify key levels to buy and sell.
Support and Resistance
Support and resistance levels are the easiest technical indicators to understand, and are often the most powerful. Support is the price level at which demand is strong enough to prevent the price from declining below that level. That is, buyers are lined up around this area. Resistance is the opposite – being the level at which selling is strong enough to prevent the price from rising above that level. The chart below illustrates a stock with well defined support and resistance levels.
 Moving Averages
Moving averages smooth the price fluctations over a period of time to form a trend. They are based on past prices, and therefore historical looking, but they provide a very good indicator of future direction.
Moving averages are often considered the fourth most important indicator to look at behind price, volume and support/resistance.
Traders most often use 20, 50 and 200 day moving averages, where the 20 day moving average covers a short term time frame and the 200 day moving average is a long term indicator. Moving averages help identify support and resistance levels. For example, if a chart shows a stock that is "bouncing" off of a moving average, we can reliable determine that this level is acting as support (or resistance).
Moving averages are also used in conjunction with more advanced technical indicators and overlays such as Bollinger Bands and MACD.
 You can see in the chart below an example of the 50 day moving average is acting as support over a long period of time. Therefore, the next time the stock retraces and touches this level, we can assume that there will be buyers at this level and that the stock will bounce and move higher. If the stock fails to bounce at this level, we might look for a bounce at the 100 day moving average (blue line) instead.
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