Technical analysis for the stock market: A beginner’s guide

When you first start learning about the stock market, you’ll learn about two approaches to predicting where stocks will go in the future: fundamental analysis and technical analysis. While they sound similar, they use different strategies and techniques to forecast how prices will change over time. Fundamental analysis looks at the value of the company’s assets, its earnings potential, and other business factors, while technical analysis uses charts and numbers to estimate value based on supply and demand in the stock market as a whole. Both types of analysis have their benefits and drawbacks, so use them both to make smart financial decisions about your investment choices.

Do your research

Fundamental analysis—the study of a company’s performance and its financial health—is what most investors think of when they hear stock market. But technical analysis, which analyzes trends in trading volume and price movements, is just as important. To be successful in your stock market investing you have to learn both fundamental and technical analyses. You need to know how things are performing on a financial level but also how people are reacting to that performance from a behavioral perspective; if you don’t, then you could end up buying into stocks simply because people are buying into them at that very moment.

Learn how each indicator works

It’s one thing to read about a technical indicator and another to understand how it works. Technical indicators are designed as visual cues that help you to make decisions on trading—it’s not enough to simply read what they do. If you really want to succeed, start by watching how each indicator responds in different types of markets. Watch your chosen indicators operate in up, down and sideways markets—keeping a written record of how they act so that you can quickly identify when a signal is false.

Sign up with a free online trading platform

Before you buy your first shares, it’s important to get a feel for trading and an idea of how investing works. Most platforms will allow you to practice buying and selling shares without any risk, so take advantage of that feature to experiment with different types of trades until you find one that works for you. For example, if you find charting or technical analysis useful when predicting price movements, choose a platform with tools like these. Or if you prefer watching moves in a stock before deciding whether to buy or sell, try a platform that offers news feeds. It can be helpful to play around with a few options so that once your money is on the line, things don’t feel so unfamiliar.

Set a plan, such as making three trades every week

There are several technical indicators you can use to inform your trading, but they require proper context. Before making a trade, it’s important to set a plan that includes both an entry price and an exit price based on certain criteria. At different times, depending on your preference, you might look at technical indicators such as moving averages, P/E ratios or momentum—along with fundamental metrics like profit margins or cash flow. (For more information about using technical indicators in your trades.) Regardless of which indicators you look at, it is important to stick to your plan and not get caught up in making money fast schemes.

Follow your own rules

Don’t blindly follow someone else’s rules. Don’t try to ape a trading system without knowing why it works or what it has done in real markets. In fact, don’t even do that if you have some idea why it works (or if you have some idea whether it is making money). Don’t rely on one indicator or valuation method, no matter how well known or reliable it may be; diversify as much as possible so that your risks are controlled and manageable.

Stay away from gurus

There are a lot of gurus out there that can help you invest in your first stocks, but they’re not all worth your time. There are plenty of websites and trading bots that claim to help novice investors make money on their first try, but most aren’t worth even a second glance. Beware any advice that sounds too good to be true; a free lunch is never free. Just like with cryptocurrency investing, trading on Wall Street requires careful research and knowledge about market trends. You should never trade without having a firm grasp of fundamental values; after all, if you’re not sure what you’re buying or selling, how can you expect to make good money?

Diversify. Diversify. Diversify.

Don’t rely on one source for all your money. This is particularly important in today’s market, where stocks are a lot less volatile than they used to be. You want to make sure you have a diverse portfolio that includes international and domestic stocks, fixed income (like treasury bonds), real estate investment trusts (REITs), and cash investments like Treasury bills. More importantly, if one investment goes south, others might be doing well. The perfect time to invest was yesterday—and it will probably be tomorrow too.

Cut losses quickly

One of your first moves should be to install a stop-loss order. This will help you protect your capital in case you unexpectedly lose money on a trade. There are two kinds of stop loss orders—one that sells when your shares reach a certain price, and one that automatically sells when your losses hit a certain point (this is called a trailing stop). Don’t put yourself in danger by trying to decide on price points—just set it and forget it. If your stop loss hits, you’ll get an email alert, letting you know immediately what happened; if it doesn’t trigger, no problem. You don’t have to check on every trade. Unless you’re investing with very large amounts of money, odds are good that any big swings will cancel out over time.

Let winners run

Technical analysts use charts to identify chart patterns, trend lines and various technical indicators in order to trade or make investment decisions. In short, a pattern that is observed in a stock’s price is used to predict its future movement. If you are already versed in technical analysis, don’t worry—we will be looking at basic patterns. Before reading on, it would be best if you were familiar with Candlestick Charts and Bollinger Bands as they are more popular than others among investors. On candlestick charts, candles with bodies above and below an average line show price movement; how far each candle wins or loses is based on how far away from the average line their opening and closing prices are placed.