5 key indicators to look at before buying your next stock!

Published: 13th January 2009
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One does not have to learn the whole field of Technical Analysis to start using it. There are too many tools and theories out there that it can appear overwhelming and time consuming. However In this article I am going to mention the 5 most basic and I feel important technical indicators or tools used, that you should pay careful attention to when researching a stock. A good investment or trading decision using Technical Analysis is based on a stock's chart. So pick a chart and begin analysing it.

1. General uptrend or general downtrend-Before investing or trading this is the most important indicator. "The trend is your friend". It is easier to make money when a stock is going up, higher highs and higher lows, called an uptrend, then when it is going down, lower highs and lower lows, a downtrend. In an uptrend each new peak that is formed is higher than the prior ones. The trend will be broken if the next low is lower than the previous low the stock fails to form a new peak higher than its previous ones. Stocks that have charts that go up and down with no direction, and no clear uptrend or downtrend are difficult to predict which direction they are heading. A stock in a steady general uptrend or general downtrend are much easier to trade.

2. MACD Crossover. After you have researched a stocks chart to see if the stock is trending, you should now check out its MACD graph. MACD-stands for Moving Average Convergence-Divergence. This graph has 2 lines , the crossing of the two lines is a signal of a new trend. The two lines consist of a fast line and a slow line. Where the crossover happens tells you if there is a trend. The fast line has to cross above the slow line, or above the 0 line. The higher it ascends above the 0 line the stronger the uptrend. The lower it descends below the 0 line the stronger the downtrend. A trader or investor wants to catch stocks that are trending big time, that is how it is possible to make good money!

3. Close above or close below the EMA'S. When analysing a stock's chart , moving averages are vital. It is one of the easiest tools used in TA. EMA-stands for Exponential Moving Average.When a stock closes above its 13 and 50 day EMAs this is a bullish signal. If a stock closes below it's 50 day and 13 day EMAs there is a good chance that it might fall to its 200 day EMA creating a bearish signal. Some stocks when they take a breather, bounce off their 5o day EMA, which creates an excellent buying opportunity before they make new highs. Stocks that have recently closed above their 50 day EMA might be reversing their trend , and might go higher.

4. Stochastic-oversold or overbought. This indicator shows you the short term movements of a stock. Essentially you want to buy when a stock is oversold and exit when its overbought. If you are considering selling short a particular stock an overbought condition might make a nice entry point. When observing a stochastic graph look out for what looks like a hook being formed, this can indicate an excellent entry point where the stock has bottomed already and it is rising from oversold conditions. Some of the best trades are when you can catch a stock that is in an uptrend, above its 50 day EMA and oversold according to a stochastic graph.

5. Support & Resistance. Support-this term describes the bottom of a stock's trading range. It's like a floor that a stock price finds it hard to penetrate through. Resistance-this term describes the top of a stock's trading range.It's like a ceiling which a stock's price doesn't seem to rise above. Support and resistance levels are essential clues as to when to buy or sell a stock. Many successful traders buy a stock at support levels and sell short stock at resistance. If a stock manages to break through resistance it could go much higher, and if a stock breaks its support it could signal a breakdown of the stock, and it might go down much further.

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