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.
I am loving this blog! I have one question though…there are so many stocks to choose from! How can you look at each one’s 5-day and 10-day MA? Do you just have a certain few that you look at?
There are certainly too many stocks to screen like this. In Canada I like to choose a company that I’m familiar with on the TSX 60 which is limited to 60 large cap, relatively stable companies. In the US I would look through the Russel Top 50 Index, which is a list of 50 companies like ExxonMobil, Microsoft, Johnson&Johnson, Chevron, and other large and highly profitable businesses that won’t go out of business any time soon. If you recognize any brands or companies in those lists, then do a 5/10 day moving average analysis to get an idea of where the moment is going. You can even do a 10/20 day SMA as well, and maybe even a 20/50 day SMA. The longer time frame you use, the more likely you’ll have success because the longer that trend has been in place is not likely to correct. If both short and long term moving averages show positive signs then it’s probably a good time to buy, technically speaking. Start with companies you know and stick with the companies that are likely to still be in business 10 years later :0)
Thank you for *really* answering my question! I am very new to the stock world and am trying to learn everything. I have maxed out my roth ira for this year. do you think it’s best to wait until January and purchase dividend stocks with my 2013 roth ira? I think that sounds like the best idea because of the tax implications with the roth. Am I thinking correctly? Or should I be thinking of something else?
I only recently started buying stocks too a few years ago :0) I see your point, especially since the Roth IRA’s maximum contribution limit is scheduled to increase to $5,500 next year, same as our Canadian equivalent, so that might be a good move tax wise. You’ve already done the right thing and maximized your current room. It really depends on how the fiscal cliff situation will play out, but US stocks have had a pretty good run this year so far, and there’s not much to gain in the last month, so I would call it a successful year for now, and plan to invest again starting in 2013 😀