This is a quick crash course on analyzing stocks using technical analysis, which is a term that describes how to predict future stock prices by analyzing past stock prices. I use tech analysis when I swing trade and so do most research analysts. Let’s use the stock I bought a couple days ago as an example, Goldcorp.
First, the stock has a strong “support” around $45, meaning the last several times the price tried to drop, something fundamental was preventing the stock from falling below $45. And right now, it is trading around that support level with an upward “momentum“, so that’s a signal to buy. Next, the red line is a simple moving average (SMA) which is a line that averages out the closing prices of a stock over a recent period of time to smooth out the fluctuating data. It basically represents the overall trend of where the stock is going. 100 days is the period used in this case. Notice how the stock over the years rarely moved below this SMA? But now it is! So this is another obvious buying signal.
Below is a closer look at the most recent stock data. In this chart I have created a 5 day moving average (green line) and a 10 day moving average (red line.) A “Moving average crossover” in technical analysis tells a trader to buy or sell. When a shorter M.A. (in this case the green line) moves down to cross below a longer M.A. it’s a signal to sell. But when it crosses from below the red line to above, like right now, it means buy.
As you can see from this chart, technical analysis actually works pretty well historically speaking. That’s not to say it’s a guarantee of course. If you are going to trade stocks, please understand the risks and do so at your own discretion. That’s basically technical analysis 101. I made these charts using free sites like Google finance or Yahoo finance. To know more about analyzing stocks, just search the internet. That’s where I learned this stuff from. Here’s a good primer from Investopedia.