Top 5 Pieces of Technical Analysis You Need to do When Picking a Stock

Stock Market Analysis

Choosing the right investments may seem like a game of chance; however, reaping profit from a stock is achievable for even novice stock traders with the right set of tools and strategies. 

By far the best way to determine the right stock is by taking advantage of technical analysis. 

For example, when applying these technical analysis tools to specific stocks, such as analyzing the South32 stock price, investors can gain valuable insights into its current market position. By evaluating the South32 stock using the Stochastic Oscillator or the RSI, it’s possible to get a better understanding if the stock is currently overbought or oversold, aiding in making more informed investment decisions.

You’ll have to be structured with your approach if you want to select stocks with high potential growth factors. Employing a stock analysis tool like UVest4U can streamline this process, providing valuable insights and aiding both seasoned traders and newcomers in their quest for successful stock selection.

It’s best understood when contrasted with fundamental analysis, which is a type of analysis that focuses on the growth and direction of the company—usually through financial statements and profitability ratios—rather than current stock price movements.

Circling back, technical analysis is a form of analysis that primarily considers the movements in stock charts. It doesn’t look into the company’s fundamentals or news on recent events.

Rather, technical analysis’s underlying philosophy is that the value of a stock can be determined from information and trends found in its respective chart.

For experienced traders, technical analysis is proven to be an effective strategy in analysing the right stock to pick at a given period. 

That said, novices can find this strategy quite overwhelming due to its quantitative nature. You’ll have to be structured with your approach if you want to select stocks with high potential growth factors.

As hard as it may seem at the start, knowing even the basics of technical analysis can give you a leg up in gaming the stock market. 

Without further ado, here are the five incredibly useful technical analyses you can perform when evaluating a stock’s worth.

Stochastic Oscillator

The stochastic oscillator looks at the closing or current price of any given stock and measures that price against a range of the stock’s historic prices over a predetermined number of periods.

This technical analysis helps traders determine whether the stock is oversold or overbought, depending on the final figure of the stock’s stochastic indicator.

The Stochastic indicator is a tool that helps traders identify price action by highlighting regions of significant price action through bands. 

In practical terms, this indicator is useful for determining whether a stock is about to undergo a price reversal and deviate from its current momentum. 

When a price reversal seems imminent, then traders can take necessary action to buy or exit the stock. An overbought stock has a stochastic indicator of over 80. On the other hand, an oversold stock has a figure below 20.

One caveat is that stochastic oscillators aren’t always effective during uptrends, as rallies can occur which can push the stock price even higher. 

As such, be sure to take a comprehensive look into the stock through other indicators before making any trading decision. Besides performing other technical analyses, you can also look at stock insights from ASR for more insights.

Relative Strength Index

Another powerful momentum indicator in the realm of technical analysis, and one of the most popular, is the relative strength index (RSI).

The RSI, just like the stochastic oscillators, is used to determine momentum and trend resilience. It helps traders identify oversold and overbought signals through an indicator that falls between zero and 100.

An RSI indicator above 70 indicates an overbought stock. This is telling of a potential correction, especially if other indicators have shown similar worrisome signals. An RSI indicator below 30, on the other hand, indicates a stock in a rallying position due to being oversold.

Besides that, the RSI indicators have two more useful functions. 

Firstly, it could indicate resistance and support levels. If the indicator holds above 30 and reaches 70 often, it means there’s an uptrend; conversely, if it often falls below 30 and doesn’t cross 70, it shows a downtrend.

Secondly, it can signal potential price reversals. If the RSI indicator is moving against the stock price’s direction, it can indicate a potential weakening and price reversal shortly after.

Moving Average Convergence/Divergence (MACD)

Moving averages are one of the first indicators stock traders learn in their investment journey. They’re fairly intuitive and easy to understand, essentially showing the price data of a stock over time in a smooth graph. 

Moving averages cover a specific period of the trader’s choosing, from 5 seconds to a year or more. 

While simple moving averages (SMA) are commonly used due to their straightforward nature, exponential moving averages (EMA) are often used in analyses since they give more weight to recent prices.

One of the indicators that utilise EMAs is the MACD line. This technical analysis’s formula involves one simple calculation: subtracting the 26-period EMA from the 12-period EMA. The difference indicates the MACD line.

The MACD line’s ninth-period EMA is the signal line, an important function that can be used to determine whether to buy or sell a stock. If a stock crosses above the line, it’s a good sign to buy. Conversely, if it falls below it, it’s a sign to sell.

Besides these technical signals, the MACD line can also be used to alert traders of potential reversals, particularly when the new high (or low) price isn’t a new high (or low) in the MACD line. This can be used in both bullish and bearish instances.

Bollinger Bands

Bollinger bands help determine whether a stock is overbought or oversold. It is composed of three bands, known plainly as the upper band, the lower band, and the middle band.

To compute it, stock traders will need to get a simple moving average of a set amount of days (a 20-day moving average is often considered the standard). Afterwards, they’ll have to find the standard deviation once the 21st day’s price comes out.

The standard deviation is multiplied by two and the resulting figure is added or subtracted to the SMA. This produces the lower and upper bands.

The point of Bollinger bands is to identify stock price volatility. 

If there’s a squeeze, it’s often indicative of low market volatility, which can mean a secure market and decent future trading prospects. If they’re farther apart, the less volatile it is and the worse trading prospects would end up being.

These bands can also show breakouts. If the price touches the upper band, for instance, it can signal that a stock is overbought and could fall. The reverse is true if the price touches the lower band, indicating a potentially good buying opportunity.

On-Balance Volume

An underutilised but effective indicator of determining a stock’s worth is by checking its on-balance volume (OBV).

Instead of looking at price movements, OBV looks at volume movements. This is a useful indicator in conjunction with price indicators.

OBV looks at two main indicators: up volume and down volume. Up volume is the volume amount during rallies, whereas down volume is the volume amount when the price falls. Solving OBV is as simple as subtracting up volume from down volume. 

This tool is useful for confirmations. When the OBV is rising (which indicates a high up volume) but the price is falling, it may mean that the price may start rising soon. 

Conversely, if the OBV is dipping—indicating a high down volume—while the price rises, it can signal a potential downtrend in price movements.

This indicator helps traders know the resilience of a stock concerning its price movements, making it effective for traders to recognise whether a stock has more strong buyers than average or not.

Will Fastiggi
Will Fastiggi

Originally from England, Will is an Upper Primary Coordinator now living in Brazil. He is passionate about making the most of technology to enrich the education of students.

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