The question has come up quite frequently in the last little while about, should you use Technical Analysis (Stock Charts), and if you should, how do you read the charts. I went the first few years not using any technical analysis at all. In my opinion it was one of the biggest mistakes I have made.
I got introduced to using charts by an electrical student who was also investing in stocks. I can not thank that student enough. Before using the charts, my wins were definitely hit and miss. Since I started to use the charts, my wins have increased ten-fold.
Like everything to do with investing, there are no hard and fast rules. Charts still predict the future, based on the past. Not a sure thing. One of the most popular charts is called the Candle Stick chart. Candle Stick charts have been around since the 1600s, maybe even longer. They were used to predict the future price of rice. The patterns they generate have proven to be accurate more often than not.
There are dozens of different patterns, many still have the oriental names. I have not memorized all the patterns, even after 12 years. Guess I’m just slow. Today’s charts have many more mathematical indicators besides just the Candle Sticks. Averages, Exponential Averages, MACD, RSI, just to name a few.
All of these are valid, and many indicators are used to confirm the movements that the candle sticks predict. Looking at all of these charts is very confusing, and often over whelming. There are just so many lines and numbers. Some are indicators, some are oscillators, some are averages. Learning all about them takes time and training. It is worth doing however.
Everyone is excited to get started, and nobody likes to wait. So is there one indictor that you can use right away with little training. The real answer is NO. But there is one that comes very close.
There is one indicator that can be very simple to use. It does not give you the highest and lowest points, but it does give you a reasonable idea as to when to buy and when to sell. It is called the MACD indicator. Moving Average Convergence Divergence.
As with all indicators, MACD is not meant to be used alone. So just looking at the MACD is not enough. This indicator is most accurate in an Up trending market. Which, when you are first starting out, is a good time to buy. The MACD needs to be used with the Candle Sticks, and Volume indicators at the very least.
Volume is the number of shares that are traded (bought and sold) in a day. Volume can range from a few hundred shares a day, to several million shares a day. As a micro investor, you will often be dealing with lower volume stocks. (Less than 100,000 per day.) Volume is normally shown at the bottom of the candle stick charts in the form of columns.
The columns are usually different colors. In this case, grey and red. Grey means more buying, and red means more selling. You can see from the example that volume can change drastically (May), or can stay pretty even (July). Volume often indicates the interest by investors in the stock. Lots of interest, lots of movement. Low volume usually means less interest and is often a sign that there will be little action.
ere is an example of the MACD indicator graph. There are 4 parts to the graph. The Zero line in dthe middle, the Signal Line, the Reference Line, and the Histogram bars. All of these are important. The following explanations are oversimplified.
The zero line separates the long term UP trends from the long term DOWN trends. The trend is easy to see when compared to the candle sticks.
The signal and Reference lines show us whether the stock is moving up or down within the trend. The histogram shows us how quickly the price is changing. Short bars small change, long bars big change. So how do we use the MACD basically? Let us look at the relationship of the MACD to the candle stick chart.
The key to the MACD is the CROSSING of the signal line and the reference line. From the above you can see that June 17 or so would have been a good day to buy. Why? The Reference line crossed above the signal line. Not only that, the MACD was at the Zero line and looking like it was heading into up trend territory. Looking at the chart you can see the candlesticks heading up.
September 19th was a bit more of a gamble. We had positive crossing but the chart was still in down trend territory. The 1st of October would have been a more secure buying day. Did the crossings hit on the LOWEST price? NO. But they were close.
We see the same sort of thing with the Selling signal. When the Reference line crosses below the reference line, as on July 30th, we have a SELLING signal. We see the same Selling signal again on Oct 21. Once again, did it cross on the highest day? NO. But close.
The MACD is a trailing indicator. So it will not give you the peaks, either high or low. In stock investing trying to hit the peaks is a waste of time. The really important quest is not, did you hit the peaks, but did YOU MAKE MONEY?? YES!!! Remember Bulls and Bears make money, Pigs get slaughtered.
While you are in practice mode for 6 to 12 months, use the chart, and the MACD, to test out if it really works for you. Use that time to learn more about Technical Analysis and how to use it. For a more detailed description of the MACD go to the these websites. www.stockcharts.com and check out the “Chart School” Tab. Or go to https://technitrader.com/stock-market-learning-center/macd/ for an excellent video about MACD.