The Beginner’s Guide To Trading Using Technical Analysis

trading using technical analysis

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Over the past couple of years, I’ve written a lot of really good content and tips for trading using technical analysis, and I figured it was time to put together the best of this info in one place. This way, anyone starting out trading can have a simple beginner’s guide to follow. My goal is to help you learn the basics of the major technical analysis indicators.

So it is after more than 3 hours of pulling it all together. A collection of the finest guides, tutorials, videos, articles; complied together in the order that they should be read.

Click the titles for the full articles. Let me know what you think via the comments!

Why Technical Analysis Is Superior

Technical analysis is one of the superior ways in which investors and traders can make better decisions when trading stocks and options. For many option traders, technical analysis gives much clearer entry and exit signals for making money in the markets. While it’s true that some investors dismiss technical analysis as inconclusive and arbitrary, the fact remains that technical analysis (when used properly) has a lot of empirical evidence to support it as a reliable trading tool.

Any good trader needs to understand how to take full advantage of technical analysis. When done properly, technical analysis coupled with volume analysis, can improve your edge in every trade. However, it is important to know that these analyses work when there is no fundamental event such as a lawsuit, merger or acquisition talk.

Support and Resistance

One of the most difficult concepts for beginning traders and some professionals alike is the understanding of simple support and resistance levels. Support and resistance in technical analysis entails movement of a security's price whereby it stops then reverses at specific price levels that are often predetermined.

These price levels are usually denoted by multiple price touches without a breakthrough in the level. Have you heard about the battle between bulls and bears? Or an ongoing battle between demand (buyers) and supply (sellers)?

This price rarely moves above resistance or below support. We understand that this can be confusing. As such, we decided to provide this very simple explanation of support and resistance levels to help you “get over the hump.”

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Moving Averages

These concepts help to identify trends and reversals, measuring an asset's momentum strength, and determining areas where an asset can find support or resistance. Here, I will point out the different periods when you can monitor momentum and how moving averages can help when setting stop-losses. I will also address the major limitations and capabilities of moving averages that you need to consider if planning to use them in your trading strategy.

Moving averages are very popular among beginning traders and investors. They are simple to use and give very easy indicators to buy/sell a stock. The 200-day moving average is generally the most talked about along with the 50-day moving average. Moving averages do not predict price direction, but rather define the current direction with a lag. Moving averages lag because they are based on past prices – which is mainly why they are not a great short term trading indicator.

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Bollinger Bands

Developed by John Bollinger, a renowned technical trader, a Bollinger Band is plotted at two standard deviations from a moving average. It is a very popular technical analysis technique. Many believe that the closer the price moves to the upper band, the more the market is overbought. John Bollinger set 22 rules that need to be followed when the bands are used in a trading strategy.

Bollinger are one of the most popular technical studies used today. They are simple and give very clear signals which is why so many traders use them on a daily basis. However, their relation to volatility and prices moves may reveal some shocking discoveries. Or at the least give you a little more understand of how they REALLY work in today’s fast moving market.

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Relative Strength Index (RSI)

This is a technical indicator intended to chart current and previous strengths and weaknesses of stocks. It is based on the closing prices in a recent trading period. It was developed by Welles Wilder, a famous technical analyst, and helps to compares magnitude of recent losses and gains over a specific period.

RSI is a momentum indicator or oscillator that measures the speed and change of price movements in a security. Traditionally it will move between 0 and 100. It is usually considered that the stock is overbought when RSI is above 70 and oversold when RSI is below 30.

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Fibonacci Retracements – Fans, Arcs, Time Series

These are popular signals that were developed by Leonardo Fibonacci, an Italian gentleman who discovered that certain ratios exist throughout all of nature. These ratios describe proportions found in atoms, stars and planets. Fibonacci Retracements - fans, Arcs, Time Series - are excellent technical analysis tools used by traders. They are not perfect but are helpful to anyone who wants to know the basics.

When a price trends downward or upwards for an extended time, prices tend to undergo a retracement. It then moves in a different direction before getting back to the previous trend. Fibonacci signals act as levels of support and resistance as prices trend. They can help predict at what point prices are likely to retrace during a trend (upward or downward).

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Ribbon Studies

Ribbon studies and multiple moving averages are becoming more and more popular among trend traders. The basic idea behind the technical indicator is that you are using roughly 12-16 different moving averages on the same exact chart (instead of using just 1 or 2 on your chart).

Moving Average Convergence/Divergence (MACD)

Whipsaw trading can really put a damper on your portfolio, so let’s take a step back right now and do a quick mini-lesson on technical analysis and MACD Divergence. After looking at charts for the past 5 days sitting on mostly all cash heading into expiration, I’ve noticed that the technical are flashing some important warning signs. Mainly, I’m seeing a whole bunch of divergence.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.

  • JETWAKE GLOBAL

    Excellent as always! Wishing you a happy holiday season Kirk! Cheers!

  • Mark Moses

    Very useful for us beginners. Helps me understand the overall purposes of these charts and indicators. Thanks for putting it together. While technical analysis seems superior, I’m curious to know if you have favorite sources for fundamental market analysis, given the magnitude of recent global events and economic crisis?

  • Greg Seymour

    Incredible summary. Have tagged this for future reference, Greg

  • This is a great post. I love trading options and stocks. I have been trading the 10 SMA crossover of a 30 day EMA. Thanks for this site. Great articles!

  • Hey Bob, which guide are you trying to get to or video tutorial? Since some areas are protected under the membership we can offer a big search function unfortunately.

    • Bob

      Kirk,

      I clicked on a link under “Week 2” of the “Fast-Track-8-Week-Options-Hacking-Guide.pdf” which brought me to your article titled “The Beginner’s Guide To Trading Using Technical Analysis”. At the bottom part of that webpage, there is a brief summary of MACD. The title of the summary called “Moving Average Convergence/Divergence (MACD)” was a link, so I clicked on it to get to the full article as suggested on that webpage. That is when I ended up on a signup or log in page. Since I was already logged in, I had no idea how to get to that article. I am trying to get to that article on MACD from the link that I clicked on.

      • Ah yes I see now. That post that was linked was a much much older post that we removed so the website just sends you back to the homepage. However we did add a cool new search feature inside the membership homepage where you can search MACD for all the relevant articles.

      • Bob

        Thanks Kirk,

        I never even saw that search window in the membership homepage until you just mentioned it. This is really cool. Thanks again.

      • After your suggestion I figured out a way to added and bought some plugin software to do the trick!