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Technical Analysis Tools for Stock Trading

Top 9 Technical Analysis Tools for Stock Trading


Technical analysis tools are the main indicators for selecting stocks for day trading and swing trading. As technical indicators help to get the instant information about price movement, almost all stock traders always try to follow these below technical tools.

Table Of Contents

1. Candlestick Chart

2. Minutes Chart

3. RSI (Relative Strength Index)

4. MFI (Money Flow Index)

5. SMA (Simple Moving Average)

6. EMA (Exponential Moving Average)

7. WMA (Weighted Moving Average)

8. MACD (Moving Average Convergence Divergence)

9. Beta Coefficient

1. Candlestick Chart Technical Analysis Tool for trading

Candlestick chart is a powerful technical analysis tool for traders to take immediate decision. This is one of the best technical analysis tools for traders.

Candlestick chart’s patterns are easy to read and easy to apply. To know right time to buy or sell stock, you just need to know the application of candlestick chart. Look at the below picture to understand the candlestick chart.

Candlestick Chart for technical analysis

Firstly, you have to understand bull candles and bear candles. Here, I have indicated red color candles as bear candles and green color candles as bull candles.

Bear Candle

Bear Candles

When open price starts to decrease, bear candle starts to create. That means, price is downtrend. Bear market also indicates downtrend market. In many charting software, bear market candles are shown as red color to highlight.

Bull Candle

Bull candles

When open price starts to increase, bull candle starts to develop. Bull candle indicates increasing price. Candles are formed by using today’s open price, today’s closing price and today’s highest price or today’s lowest price.

Suppose, opening price of R.M company is $ 60. Then price is rising to $62. Closing price is $65.That indicates bull market. At the end of the trading day, if price remains at $65, it creates a bull candle with opening price at $60, closing price at $65 and tail height at $65.

The body of this candle remains between $60 to $62. This candle’s solid color is green. On the other hand, If R.M company’s opening price starts at $ 60, it has decreased toward $55 and closed at $58, it creates a bear candle. This bear candle body is formed between $60 to $58 and downward tail height is at $55.

What does body indicate?

Body of candlestick chart is formed between opening and closing price. Difference of the opening and closing price indicates height of the body. Body also indicates how much price has increased or decreased.

What does tail say?

Another factor is tail. Tail indicates highest or lowest price of trading day. Generally, stock doesn’t close at day’s highest or lowest market price. Hence, tail cannot create body. If you have understood the above discussion, you have learnt the formation of each candle.

What is stock volume?

Volume is the number of shares trade in a trading day. A bear or bull candle has formed with a number of shares. Generally, volume shows as million. What does it happen to a candle if opening and closing price remains the same?

When a candle’s opening price and closing price are same, it creates a neutral candle. This candle doesn’t have body but it may have tail. In some cases, it may not tail or even body.

How to apply candlestick chart for buying or selling decision

Candlestick chart is easy to understand and easy to apply for making buying and selling decision. Generally, traders use charting techniques. They have to take quick decision. So, candlestick chart becomes a favorite chart for them.

1. Entry Point in candlestick chart

When candle starts to uptrend from downtrend, traders wait to take buying position. Entry techniques vary from traders to traders. Day traders may put buying order when candle starts to green and exit before another candle starts to red.

Day traders also sell short when candle becomes green and buy when candle becomes red. On the contrary, swing trading strategies are different from day trading. Swing traders observe the stock carefully. They wait for right time.

When trend is reverse from downtrend to uptrend and if this trend is confirmed to continue, then they will entry to buy. You can wait to trade trend reversal. Moreover, you can convert trading into short term investment by confirming the trend.

2. Exit Point in candlestick chart

Exit point is the opposite of entry point. When should a stock sell? At first, you should make up your mind for the golden rule of stop loss. You should not sell an uptrend stock. On the contrary, you should not increase loss.

Right time to sell a stock when its uptrend price reverse or cross your stop loss level. When a stock price is soaring up, you should wait until this stock turns opposite direction. When opposite direction starts, you should sell.

But, before putting selling order, make sure that it is the right time to sell. If a stock changes its uptrend direction with a huge volume, you should exit the trade. When your trade goes wrong direction, sell as early as possible. Never make mistakes to hold a downtrend stock.

Moreover, record date effect can negatively impact the market. In some cases, dividend declaration effect is also responsible for stock price falling.

On the contrary, you must be cautious about top 5 price sensitive dates that can impact the market. Considering these above mentioned impacts, you should take exit decision.

3. Neutral Point in candlestick chart

Neutral point happens when candlestick chart shows candles without body. In this point, buyers and sellers remain undecided position. In the bear candle, the stock is in sellers’ control. Buyers have to increase price to buy the stock. As demand increases, stock price goes up trend.

On the other hand, bear candles occur when the stock is in buyers’ control. As supply increases, buyers decrease price to buy stock. This stock price starts to move downward. But in neutral condition, neither buyers nor sellers can control the market.

In this situation, you should wait to watch the next movement. Because, stock price may move up or down at any time. Just confirm the market trend and take your buying or selling decision.

Candlestick chart is a powerful technical indicator for traders to take immediate decision. Before applying this important indicator, you should learn about the best technical indicator-RSI.

2. Minutes Chart

Minute charts show the price movement for one minute to any extended minutes. It represents bar to indicate price movement. In the below picture, you are seeing a minute chart.

minutes chart for price movement

This chart somehow similar to candlestick chart. But, many traders prefer candlestick chart to minutes chart. As the application is somehow similar, you can follow one of them or both in together. So, I suggest that you follow both chart or candlestick chart alone.

3. RSI (Relative Strength Index) Technical Analysis Tool for stock trading

RSI is another one of the best technical analysis tools. Its values remain between zero to hundred. But it has three important parts.

1. Below 30 :- Indicates over-sold

2. Above 70 :- Indicates over-bought  and

3. Between 30 to 70 :- Indicates neutral

RSI’s calculation formula is difficult to memorize and hard to calculate. Fortunately, you don’t need to learn the formula at all. Because all the trading platforms do this calculation by their software. You just need to know the application of the calculation. If you have less ideas about stock market, you should learn basics for stock market.

How to apply RSI Indicator?

1. RSI Values Below 30 means oversold

It is the golden sign to buy a stock when its RSI less than 30. As sell pressure is excessive for a stock, this stock price has decreased price or downtrend price.

But, before putting buying order, you need to think the reverse trend. By nature, a stock price falls down from 52 week high if its RSI below 30. This is demand and supply mechanism. If you know day trading strategies, you can trade trend reversal.

As demand for this stock increased, supply also increased. At one point, supply exceeds the demand and price begins to fall. When supply starts to increase for any stock, this stock price falls undoubtedly. Hence, you should wait for a perfect time.

When downtrend begins to uptrend with large volume, you should buy as early as possible. RSI 20 Indicates oversold and price begins to fall. You should wait to buy when it starts to begin uptrend again. This stock going to provide buy signal when it starts to reverse trend.

2. RSI Indicator Above 30 indicates overbought

You should not buy any stock when RSI cross over 70 unless any other suitable factors hint to buy. Other factors mean any good news, economic condition, uptrend market, healthy financial condition of the company.

Generally, stock price starts to reverse if it reaches near 100. You may day trade this stock but for short term investing, you need to avoid this stock.

Wait for some time, this stock price will downtrend in near future and you can decide to buy when it starts to uptrend again. High RSI indicates high Value at Risk (VaR).

RSI 88.76 Indicates overbought and price begins to go up . The last candle shows price is going to downtrend. It indicates sell signal.

3. RSI Indicator Between 30 to 70 is neutral

Uptrend or downtrend stock has huge opportunity for day trading and swing trading to make profit if you can identify trend at the very beginning. On the other hand, a neutral stock price nature is predictable. Today’s price indicates next day’s price or previous day’s price.

This stock price Increases or decreases in a predictable manner. No opportunity to halt- price increases much in a single day to give the chance of making huge profit. But, this prediction has exception. Everything depends on trader’s psychology.

RSI is 48.62 indicates price increases one day and decreases another day without support level. This stock is risky as its behavior is unpredictable.

A company, which has minus 700 P/E ratio but is sold at 400. Although this company has no positive earning rather the company has been making gradually huge loss year after year, traders are buying its stock at high rate.

This company’s price should be minus 750. What is the matter? Trader psychology. Gamblers interaction makes price higher high. They are making realized gain. At one stage, general investors start to buy this stock at the top price and cannot sell at the half price.

In this situation, you must keep distance from this stock unless you can identify this uptrend movement at the beginning. You should apply some other indicators to take any action.

4. MFI (Money Flow Index) Technical Analysis Tool for stocks trading

Money flow index technical analysis tool is similar to RSI indicator. MFI considers value. Moreover, this indicator indicates overbought or oversold condition. MFI below 20 indicates oversold and above 80 indicates overbought.

MFL’s value between 20 to 80 indicates neutral position for a specific stock. To find out the selling and buying time, you need to learn both RSI and MFL indicators.

5. SMA (Simple Moving Average) Technical Analysis Tool

Simple moving average may consist of any number of days. Generally, SMA may show 20 days, 50 days or 200 days. Just you can learn the average price for a period of time.

Generally, the nearest SMA shows the more recent time average price. Suppose, 20 day’s simple moving average for a stock is 60 dollars.

50 day’s simple moving average is 55 dollars. 200 day’s simple moving average is 50 dollars. Here, 20 day’s moving average is higher than 50 day’s average price.

That means, this stock price is uptrend. You may put buy order if the uptrend is going forward. So, you should buy near the lowest price of 20 days’ or 50 day’s simple moving average

6. EMA (Exponential Moving Average) Technical Analysis Tool

Exponential moving average is similar to other types of moving average. But, EMA technical analysis tool is calculated by using more recent data.

That means, you can put more importance on EMA than SMA. Although SMA, EMA and WMA are the similar indicators, you can put extra weight on EMA and WMA.

7. WMA (Weighted Moving Average) Technical Analysis Tool

Weighted moving average also weights for recent data. Present data are more valuable than past data. You can follow WMA price to understand the difference between the present price and weighted average price.

Suppose 50 day’s weighted moving average for a stock is 70 dollars. But market price of this stock is 65 dollars. If you read the candlestick chart and learn that price starts to uptrend, you should buy near 65 dollars.

8. Beta technical analysis tool for stock trading

Beta coefficient indicates systematic risk of an individual stock in comparison to unsystematic risk of the entire stock market. This technical analysis tool is used to know the volatility of a stock compared to market movement.

A beta value is 1 for a stock indicates its price is highly correlated with market movement. Its value is less than 1 means this stock is less correlated with market movement.

Its value greater than 1 means this stock is highly volatile than market movement. As beta indicates price volatility for a stock, more than 1 beta value is better for traders. They can easily sell this stock.

9. MACD (Moving Average Convergence Divergence) Technical Analysis Tool

Moving average convergence divergence is a trend following momentum technical analysis tool that shows the relationship between two moving average of a stock price.

Traders may buy a stock at bearish when MACD crosses above its signal line and sell at bull when MACD crosses below the signal line. Generally, traders can follow MACD signal line to take buying or selling decision.

In Short

Stock trading is a risky business. Hence, before starting stock trading, you should master on not only day trading strategies but also swing trading strategies. To master on trading strategies, you have to master on technical analysis tools. So, don’t waste your time and hurry up to learn above mentioned technical analysis tools.

To learn the drawbacks of day trading, you can read 20 Common Reasons Why You Should Avoid Day Trading. Moreover, you can read Frequently Ask Questions to know about stock trading and investing.

Founder of The Financial Ask


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