There are a lot of different schools of thought when it comes to investing in the stock market. There are traders who scrupulously analyze the underlying fundamentals of the stock itself and decide if it is a good buy at the price it is being offered at.
There are people who want nothing to do with analysis of any sort and simply dump their money into a mutual fund where some “expert” can make all the necessary decisions. There are even so-called BTFD, Buy the (you know what) Dip, traders who don’t care about value of any sort but simply rely on continuing central bank support to pump up everything in the market.
Another type of analysis is known as technical analysis. This is not about looking into the stock itself, which is, as noted above, actually fundamental analysis. Technical analysis is instead about trends in both the overall market as well as in the individual stock itself. If a stock were to historically appreciate 1% a month, just as an example, but was now going up 2% a month, that would be a very bullish technical indicator and a sign that you should buy the stock.
One of the most well-known of the technical indicators is a Moving Average. These are delineated in various time frames such as a 50-day MA or a 200-day MA. A 50-day moving average is simply the price of the stock at closing over the past 50 days, all of them being added together and then divided by 50. Tomorrow, the earliest day of that moving average will be dropped from the bottom of the list and today’s closing price will be added to the top in order to get the current 50-day moving average.
Stocks or other investments that are trading above a moving average line are obviously doing well, particularly if the trend is moving up and away. They are in need of watching if their price is now closing in on or crossing below the moving average. By graphing several short and long term averages, it gives a clearer picture of the stock’s performance. If it is breaking out of one trend line after another, that’s good. If it is diving under all of them, that’s bad.
There are several other common technical analysis tools commonly used, such as an RSI, or Relative Strength Index, and candlestick charts, which show daily opening, closing, and intermediate movement all on one vertical line graph. The point of technical indicators is to spot places to enter or exit the market before the reality becomes commonly known to those who use other forms of analysis.
