Technical Analysis

stock chart
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When it comes to timing the markets, it is almost impossible to win every time and outperform the markets in the long run.   You can however outperform the markets and this can be done very easily in the short term, if you know what you are doing when it comes to reading stock charts.  The logic behind this statement comes with my 2 years of experience with day trading and a 92% win rate over a period of 10 months with an investment on each trade I made, of at least $10,000.00.

You can be the best day trader out there.  You can be the smartest person on the trading floor and you can have a near perfect win rate.   The truth of the matter is… eventually you will lose when it comes to day trading and here is why!

Look at day trading as gambling in a casino and look at it no other way.  The best gamblers in casinos sometimes lose and when they lose, they can lose small or they can lose big right?  It’s the same concept with day trading, you can lose small or you can lose big, you can also win small or win big.

Forget about the winning part of day trading for now.  I want to inform you of the RISK with day trading first and then we will get to the winning part.  If you know you are going to lose would you rather lose small or big?  You would rather lose small right?  I know I don’t want to lose big that’s for certain.  So if you know you would rather lose small, then first you need to equip yourself with some tools and knowledge on day trading.   Price movement is one of the most crucial parts of timing a stock and because of this, you need to know something about chart reading also known as technical analysis.

What is technical Analysis?


Technical analysis is a skill that is possessed over time from watching the price movement of a stock on a chart.  It involves reading what is called a (Candle Stick) and implementing strategies for entry and exit positions based off the movement of candle sticks on a chart.

If you are unfamiliar with what a chart and candle sticks look like you can go to www.freestockcharts.com and see for yourself what a chart consists of for reading price movements on a stock.

How to setup a candlestick chart


So how do you read stock charts?  First, you need to know some basics, such as how to select your stock, what different time frames you can look at and what the green and red candle sticks actually mean.  Below is a picture of a stock chart so you can see what I am referring to here.

Stock Chart 1.

stock chart

 

 

 

 

 

 

 

 

 

 

  • Picking your stock – The light grey tabs at the very top of the picture that read XIV – 1 minute, GBP/USD – 1 minute ect… These are stocks/currency pairs I have added into the chart. You can create a chart by selecting the drop down that is highlighted in the picture below here and searching for your stock symbol.  Once you have found your stock symbol simply select the stock and it will appear on the screen as shown below.

stock charts 2

  • Select your time frame – Next you want to select a time frame appropriate for your trade.  For example, when I make a trade I like to USUALLY play a time window of no more than 15 – 30 minutes.  That is a very short window and if your wondering why I play such a short time frame…. it’s because I limit or reduce my risk of losing BIG this way.  To select a time frame, CLICK the highlighted drop down arrow next to where it reads 1 minute as seen below.

stock chart 3

Time limits can vary, so make sure you pick one that is appropriate for your tolerance for waiting.  I say this because if you are impatient and want quicker/less reward on your returns and don’t want to play RISKIER trades then perhaps shorter time frames are a better fit for you.   Longer time frames expose you to more RISK because there is more time for a stock price to move up or down however the longer time frames allow for BIGGER rewards or BIGGER losses too.  This is just something to keep in mind when selecting your time frames.

Below is a selection of different time frames you can select from.  The selection of days goes all the way up to monthly, quarterly and yearly.

stock charts 3

How to read a candle stick


Now that you know how to set up a stock and how to set up your time frames, the next thing to learn about is how to read a candle stick.  The candle sticks are Red and Green as shown on stock chart 1. at the very top of “how to read a stock chart”.  You be wondering what the red and green stand for right?  Before we get into what those stand for, lets cover two terms in this segment for appropriately identifying the red and green candle sticks.

Terms for identifying candle sticks: 

  • Bullish – This term means that investors are aggressive, they are (buying stocks) or that the price of a stock is gaining momentum upwards in price.
  • Bearish – This term means that investors are scared/passive, they are (selling stocks) or that the price of a stock is losing momentum downwards in price.

It’s important to know these terms and what they mean because they go hand in hand with RED and GREEN candlesticks.   So below, I have laid out what the candle sticks mean by their color.

GREEN candle stick – This means that the price is gaining momentum.  NOTE: there are two forms of green candle stick to pay attention to.  Not all charts read this way but freestockcharts.com has 2 variations of green candlesticks.  There is a green candle stick that is completely colored in green and one that is outlined in green like shown in the pictures below.

  • Open green candle stick  – Means the stock is gaining STRONG momentum and is going to keep gaining momentum.

open green candlestick

  • Solid green candle stick – Means the stock is losing momentum but is still in a bullish state.  It basically is saying to you get ready because the candle stick will probably turn red or the price will start going down soon.  NOTE: If you notice in the picture below on this example, the candle sticks turned red just minutes after the solid green candle stick popped up on the chart.

closed green candle stick

RED candle stick – Means that the price of the stock is losing momentum.  There is a open red candle stick you might see on occasion but you won’t see it too often.  If you do it means that the candlestick will probably turn green before to long.  It’s basically the same rule that applies to the red candle sticks that applies to the open green and closed green candle sticks.  It’s the same concept.

What are indicators?


Now that you know how to set up charts and read candle sticks what’s next?  In order to fully maximize your potential for making $$$ day trading you want to learn about indicators.  There are too many to cover in this article so I will be sure to post articles and lessons on each indicator in the future.  Just know that there are multiple indicators that can be added to a chart to read other metrics of a stock.  Things such as acceleration bands, bollinger bands, commodity channel index and the list goes on.

These indicators can be added so that you can follow a specific proven strategy that works when it comes to making successful trades so that you can make more $$$.  Below I will include one basic indicator, that is very beneficial for tracking price movement, so you can get an idea of when it will bounce from a lower price to a higher price.

Stochastics Indicator:

The “stochastics indicator” is a very basic indicator I use to track when a stock price is hitting a bottom or (SUPPORT level).  If you hear traders talk about support levels in price movement, this is what they are referring to.  It is the bottom of the range in a stock.

  • SUPPORT level – For example, a stock XYZ might have a range of 10.00 – 15.00 on a monthly moving average.  This means that the support level is 10.00 or that the bottom price at it’s lowest price is 10.00.  It hasn’t hit 9.99 yet so the (supporting floor) for the lowest price on stock XYZ is 10.00
  • RESISTANCE level – The resistance level is just the opposite of the support level.  In the example of stock XYZ the resistance level would be 15.00.  This means that the stock hasn’t hit 15.01 yet and it meets resistance to jump higher in price at 15.00.

So how do you use the stochastics indicator?  If you look to the far right of this picture, you will see a set of yellow numbers 99.00 through 0.00.  Basically what you need to know is that any time this number drops below 10.00 get ready because there is probably a bounce in the price that will come shortly after.

NOTE: Notice after each time it hit 10.00 or below that the price took a bounce upwards.  This does not always happen and it should be noted that this is simply a tool to help gauge your entry or the time you want to buy and the time you want to exit or sell your stock.

stochastics

 

Have a exit strategy!


BE EXTREMELY CAUTIOUS when you are day trading.  Again, I can’t emphasize this enough, that you are not always going to win every trade.  You should plan each trade before you make your trade.  Make sure you have a exit strategy in place if the stock DROPS in price after you have bought in on your position.  I usually like to give myself a cutoff price that I will sell on no matter what happens.  So if I buy in on stock XYZ at 15.00 and it doesn’t go up in price and starts going down instead… before I ever make the trade, I will tell myself that maybe 13.00 is the cut off price.

How to plan out the exit strategy


The key to the cut off price is taking your total amount of shares you buy in at or (OWN) and multiply whatever the difference is in your loss you are willing to take by the amount of shares you own.  So for example, if I own 200 shares of stock XYZ at 20.00 a share, my total amount of money needed to buy in would be 200 X 20.00 = 4,000.00

Now I say to myself, what am I willing to lose if the stock XYZ drops in price?  So I take my 4,000.00 which is the total amount I bought in at and I subtract whatever amount I am willing to lose off the share price of XYZ.  So lets say, I will SELL stock XYZ if it hits 18.00.  That would be a 2.00 difference from the original 20.00 price I bought in at.  20 -18 = 2.00.  Now I take 2.00 X 200 shares because remember, I bought 200 shares right?  So 200 shares multiplied by 2.00 = 400.00.  This would be the total amount I am willing to lose on a 4,000.00 investment is 400.00

This is just one way to plan an exit strategy.  Another way to do this automatically through a broker is through something called a STOP/LOSS. We won’t cover that in this article.  I will save that for another post in the future.  If you have any exit strategies you would like to share, please feel free to do so in the comments below.  Again I do not know everything about day trading and there are other ways to exit a trade successfully so by all means please share them with us.  Thank You!

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