Charts
Stock charts are snapshots of a stocks price, that can be viewed in real-time and with the price plotted in various ways. A simple line chart can be used, a bar chart or candlestick chart. A line chart is as simple as it sounds, if the price goes up, the line goes up, if the price goes down, the line does down. A bar chart needs a bit more description. The stock prices open is represented by a horizontal line on the left side, and the horizontal line on the right side is the stock prices close for the day. The line below the open is the low of the day and the line above the close is the high for the day. See image below.
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| Bar Chart |
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| Candlestick Chart |
What are trend lines? To simply put it, trend lines are used to determine whether a stock is in a current uptrend or downtrend. Trend lines can also be used to find entry and exit point in a stock. See the chart below to find lower and upper trend line.
When a trend line is drawn on a chart with 2 or 3 perfectly matching points, there is a confirmed trend. As seen in the AMRN chart above, the upper trend line touches three points. The far lower trend line touches 3 points, and the mid trend line only touches 2. It takes some skill to find trend lines, so look hard and you should find them. The chart above is a daily chart, which is good for a trader who would like to hold a stock for a few days or even weeks. Day traders typically use any chart from a minute chart to a hourly chart. Pick your type of chart, and draw in some trend lines. I would recommend Stikky Chart Stocks: Learn the 8 major chart patterns used by professionals and how to interpret them to trade smart - In one hour. It's an interactive book that allows you to draw in your own trend lines on charts. So make sure you have a pencil and a ruler handy. You can literally go through this book in an hour and learn all of the important fundamentals to chart patterns.
Technical Indicators
There are many technical indicators out there, the only question is which ones are good for you? The top technical indicators that I use for trading is stochastics, MACD, stochastics RSI, parabolic SAR, and bollinger bands. Like I said there are many more and you are welcome to explore them. However in this tutorial I will only talk about these technical indicators. Indicators can be enabled using www.freestockcharts.com.
Stochastics
Stochastics measures a stocks momentum, whether the stock is going up or down. This indicator is used a lot and helps determine overbought and oversold levels. In the chart above you can see the stochastics depicted by the yellow and white lines, going up and down, almost following the stock price. For instance, when the stock price came down to its lows, the stochastics showed oversold levels, indicating that the stock price should start showing strength. The same goes for overbought levels. Usually 80 is considered overbought and 20 is considered oversold. In the chart above, we can see that the stochastics are at 73.89, almost at overbought levels. We can also see that each time stochastics came up to 80 or down to 20, we saw a reversal. Stochastics is a very powerful indicator and it is highly recommended.
MACD
MACD is another momentum indicator which is plotted similarly to stochastics. You can see MACD plotted in the above chart in white and blue below the stochastics. MACD is plotted by using moving averages, typically a 12 and 26 day moving average. When both lines cross to the upside, you would typically have a rise in stock price. When both lines cross to the downside, you would typically have a drop in stock price.
Stochastics RSI
Stochastics RSI is basically the stochastics indicator applied to RSI. The stochastics RSI can be used the same way as regular stochastics. The stock is considered oversold at 20 and overbought at 80. In the chart below you can see that AMRN is overbought at 80.
Parabolic SAR
The Parabolic SAR is a great tool to use to determine whether a stock is in a current uptrend or downtrend. Parabolic SARs are represented on a chart as white dots. When the dots are below the stock price, this means the stock is in an uptrend. When the dot is above the stock price, the stock is in a downtrend. The Parabolic SAR is seen in the AMRN chart above. The dots are currently below the stock, which means that the stock is in an uptrend. We can also see that the stochastics and stochastics RSI are heading up, which is also a good sign. MACD is showing sideways movement.
Bollinger Bands
Bollinger bands measure market volatility. When the top and bottom bands contract, and the bands begin to expand as seen in the chart above on March 12, the price shot up. Once the price hit the top of the band, it came back down to the 200 and 50 day moving average depicted by the blue and yellow lines. Look at the chart above and focusing on bollinger bands, there's a possibility that the stock will start to come down.
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| AMRN stock represented on the daily chart - May 29 2012 www.freestockcharts.com |
Technical Indicators
There are many technical indicators out there, the only question is which ones are good for you? The top technical indicators that I use for trading is stochastics, MACD, stochastics RSI, parabolic SAR, and bollinger bands. Like I said there are many more and you are welcome to explore them. However in this tutorial I will only talk about these technical indicators. Indicators can be enabled using www.freestockcharts.com.
Stochastics
Stochastics measures a stocks momentum, whether the stock is going up or down. This indicator is used a lot and helps determine overbought and oversold levels. In the chart above you can see the stochastics depicted by the yellow and white lines, going up and down, almost following the stock price. For instance, when the stock price came down to its lows, the stochastics showed oversold levels, indicating that the stock price should start showing strength. The same goes for overbought levels. Usually 80 is considered overbought and 20 is considered oversold. In the chart above, we can see that the stochastics are at 73.89, almost at overbought levels. We can also see that each time stochastics came up to 80 or down to 20, we saw a reversal. Stochastics is a very powerful indicator and it is highly recommended.
MACD
MACD is another momentum indicator which is plotted similarly to stochastics. You can see MACD plotted in the above chart in white and blue below the stochastics. MACD is plotted by using moving averages, typically a 12 and 26 day moving average. When both lines cross to the upside, you would typically have a rise in stock price. When both lines cross to the downside, you would typically have a drop in stock price.
Stochastics RSI
Stochastics RSI is basically the stochastics indicator applied to RSI. The stochastics RSI can be used the same way as regular stochastics. The stock is considered oversold at 20 and overbought at 80. In the chart below you can see that AMRN is overbought at 80.
Parabolic SAR
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| AMRN chart overlayed with multiple indicators. |
Bollinger Bands
Bollinger bands measure market volatility. When the top and bottom bands contract, and the bands begin to expand as seen in the chart above on March 12, the price shot up. Once the price hit the top of the band, it came back down to the 200 and 50 day moving average depicted by the blue and yellow lines. Look at the chart above and focusing on bollinger bands, there's a possibility that the stock will start to come down.
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