Putting it all together – a basic routine for investment
This tutorial aims to give a basic understanding of technical analysis and to at least whet your appetite to learn more. The good news is that there are many excellent books on the subject and these can be obtained by visiting our online Bookshop located on the top menu bar of the home page.
How to apply this tutorial
Technical analysis can be applied as :
- a means of identifying potential investments which can then be investigated further using analysis of underlying fundamentals, newsflow etc.
- a timing tool to fine tune entry and exit points for an investment selected using other forms of analysis.
However you use technical analysis, a disciplined approach is essential. Try to develop a routine way of analysing your investments and follow this each time you review existing holdings or investigate new positions.
Here are some basic steps for looking at stocks:
1. Determine the current trend of the relevant stockmarket indices.
- When did this trend last change ?
- Where is the major support and major resistance ?
- Is the market trend likely to aid or hinder specific stock trends ?
2. Determine the current medium term trend of the stock (use a five year bar chart)
- When did this trend last change ?
- Where is the stock positioned relative to major support and resistance ?
3. Determine the current short term trend of the stock (use p&f chart and 6 month bar/candlestick charts)
- Where is the short term support and resistance ?
- have there been any important reversal patterns ? if so, do they re-enforce particular areas of support or resistance?
4. Do the moving averages confirm the above trends ? is the price above its 50 day and 200 day averages and are the shorter term averages above the longer term ones (20 ema versus 50 ema).
5. Determine the relative performance of the stock
- Is the relative indicator suggesting outperformance/underperformance and has this changed recently ?
- Is the stock in a strong sector relative to the market (view sector indices)
6. Are the momentum indicators positive and do they confirm the stock action ?
7. Has there been any strong volume activity in the last six months and did this coincide with a likely trend change or help confirm an area of support or resistance ?
By answering the above questions, one should develop a good background to the current technical strength of the stock in question. This will make it possible to compare it against other contenders for investment.
One should also be able to develop a strategy for investing in that stock. One can determine a potential price target at a previous level of resistance although this is more difficult if the stock is making new highs ! One should also identify the level at which the trend will have been negated, the "stop" level at which one should seriously consider selling one’s holding or at the very least re-appraising the situation.
