According to research, almost 80% of day traders lost money over a twelve-month period.
If you want to make money on the stock markets, you must develop a strategy. Making emotion-based trades and praying that they’ll work is a recipe for failure.
Technical analysis can help you predict stock market movements and prevent your emotions from sabotaging your portfolio. It allows you to trade with clear-minded logic. It can also give you price direction insights without having to keep your finger on the pulse of all the fundamental factors.
Keep reading to find out how to leverage technical analysis to improve your stock trading.
Step 1: Analyze Chart Patterns
Chart patterns can allow you to start predicting stock prices based on market data instead of piecing together complex fundamentals.
If you’re new to the game, start by drawing trendlines. Trendlines give you a visual on the market direction and allow you to clearly see if a market is trending up, down, or sideways. Chart patterns can also reveal key support or resistance levels.
If stock market movements break out of your trendlines or support/resistance levels, this can be a buy or sell signal.
You also need to learn how to read candlestick patterns. They can give you an early heads-up to market reversals.
Step 2: Know Your Indicators
Technical indicators are another tool you can use to forecast stock market movements. Some of the most important ones include:
- Moving averages (MAs): smooths out price data and can make it easier to spot trends
- Relative strength index (RSI): momentum indicator that measures speed and magnitude of price movements and can indicate overbought and oversold conditions
- Moving average convergence divergence (MACD): reveals changes in momentum and can be a valuable source of buy and sell signals
Besides studying indicators, you should also get familiar with oscillators. This technical analysis tool is a powerful trend indicator that can uncover overbought or oversold conditions.
Step 3: Spot Divergences
Whether you’re trading bonds or trying to gauge volatile stock market conditions, divergences are like liquid gold for traders. By spotting divergences, you can get into a trade (or out of one) early and maximize your profit potential.
Divergences happen when an indicator and the price move in opposite directions. For example, if a stock price reaches a lower low, and the RSI simultaneously reaches a higher high, you’re witnessing bullish divergence.
Don’t Forget to Manage Risk
It doesn’t matter how good your technical analysis is, if you aren’t managing risk, you’re likely to lose your profits. The best way to manage risk is by rationally establishing entry and exit points ahead of time. You can do this with stop losses and take profit orders.
This can help you sidepass cognitive and emotional biases, which can affect your decision-making and trigger suboptimal outcomes.
Continuous Learning Is the Secret to Mastering Technical Analysis
Savvy technical analysis is critical if you want to make money on the stock market. But it’s not a once-and-done area of knowledge. You need to commit to continuous learning.
If you’d like to broaden your knowledge, visit my YouTube channel, Figuring Out Money.
In the meantime, do you want to access trades you can make right away? I also publish trading ideas on Patreon.
Click here if you want access to my technical analysis stock trades.
