Traders use a variety of charts and technical indicators to analyze an individual stock as well as the overall market.
They use stock charts on which they apply trendlines, Bollinger Bands, moving averages, Keltner Channels and other indicators to help them form opinions as to future price movements.
They look for guidance on both the direction and the magnitude of near-term movements. Technical indicators such as the RSI, MACD, ADX and others, are displayed below a stock chart, and are valuable tools in market analysis.
With the power of today’s computers, both industrial and for home, and the easy access to high-speed Internet connections, traders can analyze, sort and organize incredible volumes of stock data in a fraction of a second, while sitting in a comfortable chair.
How Many Stock Market Charts Are There?
There are literally dozens and dozens of technical indicators that can be applied to stock charts. Each has a special purpose.
One may be used to predict the short-term directional movement of a stock, while another deciphers the strength of the next movement.
There is a core group of indicators that are popular with traders, and it’s advisable to learn and understand how to use these and interpret their results.
We recommend trendlines, volume bars, moving averages, candlesticks and the Moving Average Convergence/Divergence indicator as powerful tools for traders.
We’ll touch on a few other commonly used indicators you’ll see traders using.
Which Stock Chart Should You Use?
Know that there is no one single “holy grail” chart indicator that will help you make successful trades consistently. Also be aware that “the more the merrier” does not help.
More than one indicator should be used in harmony with another to confirm your opinion of future expected performance, however, using too many indicators can clutter up a chart and possibly produce confusing results.
Use one or two indicators to reveal the direction a price is likely to move, and another to predict the strength of that movement.
All stock charts show volume bars along the bottom of the charts. Volume is an indicator of strength.
A stock price may move up, but if the volume on that move is weak, this indicates the market doesn’t have a lot of faith in further upward movement.
The current price is most likely the price that the “crowd” believes is fair. If waning volume happens after a long period of upward or downward movement, this could be a sign that the trend is coming to an end.
Watch for a period of possible sideways movement, as the stock takes a break and consolidates. This can also signal a reversal to a downward or upward movement.
Popular Chart Indicators
Popular chart indicators used to show the strength of a stock’s current move in it’s current direction include the RSI (Relative Strength Index), the ADX (Average Directional Movement Index), OBV (On Balance Volume), MFI (Money Flow Index), volume bars, and the length of candlestick bodies along with their wicks and tails.
RSI
The Relative Strength Index (RSI) reveals overbought and oversold conditions, warning of possible reversals. It also gives a clue about the strength of the current price directional movement.
ADX
The Average Directional Movement Index (ADX) is a line plotted below the price chart. Is gives a numerical value between zero and 100 to measure the overall strength or weakness of a current stock trend.
OBV
On Balance Volume (OBV) is a momentum indicator that uses volume to predict changes. The theory is that although volume may increase, a stock price can lag behind, and does not readily change.
Eventually, volume will drive the price upward, but OBV may give an early heads up.
MFI
The Money Flow Index (MFI) is also a momentum indicator based on the flow of money into and out of a stock. No doubt you’ve heard the old saying, “Follow the money.” ‘
MFI is similar to the Relative Strength Index, but whereas RSI is based solely on price, MFI includes volume, revealing money movement into or out of the stock.
Directional Indicators
Directional indicators include drawing trendlines. Typically, lines are drawn on daily closing prices on stock charts.
Although stocks usually oscillate up and down, having troughs and peaks along the way, they may have an overall directional trend.
An uptrend is when a stock’s price shows successively higher highs and higher lows. Each time the stock goes high, it reaches a price higher than the previous time, and when it dips, it does not drop as low as the last time.
A downtrend, of course, is the opposite, namely a series of successively lower lows and lower highs.
Drawing Trendlines
You don’t have to be a genius to draw trendlines, and they are easy to interpret as to how a stock price might move in the short term.
To draw a trendline for an uptrend, draw a line that touches two or more of the lowest price points on a chart. Extend the line to the right (into the future).
The theory is that when the stock price falls below this trendline, the trend is probably reversing, and the upward trend may be nearing the end of its run, at least for now.
To draw a trendline for a downtrending stock, draw a line that touches two or more of the highest points on a chart. Extend the line to the right. A trend reversal is signaled by the stock price rising above this line.
Naturally, it only takes two points to draw a straight line. The more peaks (or dips) that touch a trendline, the more credibility it has in defining the trend. Also, the longer the period of time the trend has continued, the more reliable the continuation.
When parallel trendlines can be drawn across the peaks and troughs of a stock (creating what is referred to as a channel), a special case is presented.
These parallel lines can be horizontal or can tilt upward or downward. Extending these parallel lines creates a bottom price area (a “floor” or “support” level) and a top price area (a “ceiling” or “resistance” level).
If a stock breaks above a resistance level or below a support level, it is often an indication that the stock may be breaking out of that pattern and will continue to move in that direction.
If this happens on heavy trading volume, that helps confirm a new trend, indicating there is pressure to force the new direction to continue.
Consider Reading: Stochastics Technical Analysis For Measuring Price Momentum
A Look at Moving Averages
Moving averages measure the mood of the market. Moving averages are a smoothing technique that removes abrupt, choppy fluctuations (“noise”) in the daily movement of a stock.
A stock’s closing price represents the opinion of the “crowd,” that is, the majority of traders, regarding the value of that stock for that day.
By averaging the closing prices of a stock for several days or weeks, the general direction the stock is moving becomes apparent.
As each new day comes, the oldest price in the period being averaged is replaced by the closing price of the new day, and the average is recalculated. This continuing calculation through time gives it the name moving average.
Plot both a long-term and a short-term moving average to see if the lines cross, which can indicate a change in a stock’s price direction. Values used for these short- and long- day trends are typically 8, 10, 20, 50, 100 and 200 days.
Disadvantages of Simple Moving Averages
A disadvantage of the simple moving average approach is that it will allow an extreme high or extreme low to distort the true value of the stock, possibly giving false buy or sell signals.
Also, moving averages don’t perform well as trend indicators when a stock is choppy, and trend reversals shown by a moving average will always lag behind the actual stock price change.
EMAs
Exponential moving averages (EMAs) are more reliable for short-term forecasting than simple moving averages (SMAs).
Exponential moving averages weigh the most recent prices heavier than earlier prices, unlike simple moving averages, which weigh all prices in the time frame equally.
The EMA is better for swing traders than the SMA, because it provides clearer trending signals.
We like using the 5-day exponential moving average (to indicate the short-term direction) and the 20-day exponential moving average (to represent the longer-term direction), as it tends to be good at predicting price direction.
Generally, it is advisable to trade ONLY in the direction of the 20-day simple moving average (SMA), whether that is upward or downward. The 200-day SMA can give a longer-term view, and can be used as a support or resistance level.
MACD
The Moving Average Convergence/Divergence indicator or “MACD” (pronounced “mack dee”) is a commonly used indicator by traders. It is valuable in predicting the general direction of a trend in the short term.
MACD was designed to be applied to stocks that are currently in a trend.
While there are more technical indicators available than you can shake a stick at, when too many indicators are on a stock chart, they can be confusing. Some may even seem to contradict each other.
Therefore, take some time to study the intricacies of these indicators and then “paper trade” using them. See which ones you find the most useful for you.
Candlesticks and the MACD are the favorite of many traders, and you may find these to be most beneficial to you.
How Do You Find a Stock Market Graph?
Thankfully, there are many stock market graphing websites. Most are free, and some offer a small fee for access to advanced features and technical indicators.
StockCharts and Barchart are popular free sites. Finviz also has a stock screening section that allows you to enter a host of parameters to search by, such as price, volume, volatility, moving average ranges, and much more.
Both TradingView and Yahoo! Finance let you put more than one indicator simultaneously on the screen.
Yahoo is very handy in that it has one page that shows a stock’s fundamentals, and clicking on “chart” takes you to a stock graphing page, where you can add any number of technical indicators.
Personally, I set my browser “favorites” to this page on Yahoo! Finance. Here I can enter any ticker symbol, while it shows me the ETF “spider” SPY, which shows the current S&P 500 status.
Stock chart platforms can plot pricing action in a candlestick format rather than a line graph. Understanding candlesticks is fairly easy, and they give us great insight into a day’s price movement (or whatever period of time each candle represents).
A single candle tells us the opening and closing price, the strength of the movement (by the length of the candlestick body), and the high and low price extremes for that period.
When several candles care examined together, patterns can be seen that give us clues as to the next potential price move.
For a strong bullish opinion, look for a minimum of three green candles with consecutive higher highs and higher flows (or for a downtrend, lower lows and lower highs).
For even more confirmation, compare this candlestick pattern to their relationship to moving averages, which are plotted right on the stock graph along with the candlesticks.
For example, use a 13- or 20-period exponential moving average line to see if the pattern remains above (bullish) or below (bearish) the moving average line.
In Conclusion
We recommend learning to use trendlines, candlesticks and MACD as your “go to” technical indicators. Of all of the many indicators available, you will find these to be your best friends!
Do you have a favorite technical indicator? If so, let us know in the comments below!