Technical Analysis Basics
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Want to Understand Technical Analysis but don't know where to start?
Technical Analysis (TA) is a must for any trader wanting to make significant profits with the share market.
Even if you trade news, fundamentals or even just rumours, a small understanding of TA will help you to pick the best times to enter and exit a position.
Just what is Technical Analysis?
The name itself puts off many people - just sounds too hard, but TA is quite simply the use of maths to help understand a stocks trading behaviour and help predict future movements.
How can TA help me - I don't know Maths!?
Thankfully, today's technology doesn't require one to be a doctor of mathematics to quickly and efficiently reap the benefits TA provides. StockScan takes the maths components away and just leaves you with the benefits..
Crash Course: The Simple Moving Average
The Simple Moving Average (SMA) is aptly named as it is one of the simplest of all the Technical Indicators (and, yet, most commonly used!) The SMA is the average of a stocks price (traditionally close price) over a set period of days, weeks or months.
For example, the 7-day SMA is the average of the stock price for the last seven days.
Consider the following example:
Stock ABC
| Trade Date | Close Price | 7 Day SMA | 21 Jan
| 12.50 | (unknown because we don't have 7 days of data at this point) | 22 Jan
| 12.55 | (unknown because we don't have 7 days of data at this point) | 23 Jan
| 13.20 | (unknown because we don't have 7 days of data at this point) | 24 Jan
| 12.85 | (unknown because we don't have 7 days of data at this point) | 25 Jan
| 12.10 | (unknown because we don't have 7 days of data at this point) | 28 Jan
| 12.20 | (unknown because we don't have 7 days of data at this point) | 29 Jan
| 12.00 | 12.49 (The Average Price over the last 7 Days, including this one)
| 30 Jan
| 11.80 | 12.38 (The Average Price over the last 7 Days, including this one) | 31 Jan
| 11.85 | 12.28 (The Average Price over the last 7 Days, including this one) | 01 Feb
| 11.60 | 12.05 (The Average Price over the last 7 Days, including this one) |
We Have an Average - So what?
It's one thing to know the maths behind an indicator, but its another thing entirely to understand what that maths tells us as investors.
SMA for example, creates a "smoothing" effect on the daily activity of an equity. This smoothing affect gives us some indication of how a stock is performing removed from the "noise" of everyday trading.
Here we see a more humanly readable view of the basic trends of the stock in question. We can now use this view to help predict price movement.
Understanding Signals
Signals are when any combination of indicators match a preset rule or criteria, a common SMA signal is when the 7 DAY SMA crosses the 21 DAY SMA. This is called a 21/7 Crossover.
The theory behind this crossover is there is one "slower" moving average (the more periods used, the "slower" the indicator - in this case, the 21 day SMA) and a "faster" SMA, less periods, namely the 7 Day SMA. It uses the assumption that stocks, in a short period of time, tend to stay around a certain range, peaking and dipping, but generally within a certain range.
When the fast indicator (7 Day SMA) crosses higher (above) than the slow indicator (7 Day SMA), the theory suggests that the stock is below the current trading range and needs to rise in order to meet that range. Likewise, when the slow indicator crosses above the fast indicator, its time for the stock to drop back to that typical trading range.
The 21/7 Crossover can be a good confirmation of the
direction a stock is trending. In the above example each signal is triggered in
the general direction the stock is moving. While each trade would have resulted
in a profit the signals are quite late in identifying the trend and any
impending stop-profits would have exited the trade relatively early.
The 21/7 Crossover can provide useful signals when starting
out in TA but obvious improvements can be made to greatly improve your profit
margins.
Let me just also add, a prudent trader would never solely rely on the 21/7 SMA
Crossover, additionally, different stocks demand the use of different
indicators (spec / high risk stocks behave much differently to low risk blue
chips)
Show me the Indicators!
For more information on the indicators supported by StockScan, please view the Indicators Explained page. To see some example scans, visit the Example Scans page.
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