Trading stocks using technical analysis can seem daunting and maybe even a little excessive. When you get to know how to use technical analysis to your advantage it can really increase your profit margin and quickly stop losses per trade. However, if not used correctly you can completely ‘clean out’ your account in a matter of months. Take your time and learn this! It could be the difference between a rich and poor lifestyle.

If your completely new to investing in stocks check this article out first: Investing in Stocks for Beginners

What Is Technical Analysis

Technical analysis is one of many strategies that traders and investors use to determine the direction of a stock and it is also used as a timing tool (when to buy and sell). This is accomplished by evaluating the historical movement of the stock’s price and finding patterns that lie within the stock’s chart. To assists with these chart patterns, many traders use indicators such as MACD and Volume. A technical indicator is a series of points or lines that use a formula which takes data from the price movement of the stock. These indicators can be used to verify an uptrend or even warn when a trend reversal is soon to occur. But be careful, using the wrong indicators, using too many, or just simply reading them incorrectly can ruin your ability to see actual patterns.

Whether you’re a day trader or a long-term buy and hold investor, you can use technical analysis to your advantage. Technical analysis allows you to determine where to enter a trade and when to exit. This can not only make you plenty of money, but it can also save you from the ups and downs of the markets. Once you’ve understood the basics taught here you can then go on to practicing and apply more advanced strategies using technical analysis.

Chart Pattern Recognition

The first thing you must choose when first starting to use technical analysis is, “what type of trader are you?” so you may pick a time-frame related to your style of trading.

  • Day Trader: A day trader buys and sells a stock by end of the day. Typically never hold a trade more than one day.
    • I highly recommend that no one trade like this. The majority of day traders usually end up ‘cleaning out’ their accounts within a couple of months. This strategy, NO MATTER WHAT ANYONE SAYS, cannot be sustained for long periods of time. What billionaire do you know says that they are a day trader?
  • Swing Trader: Trades a stock and holds it anywhere from 24 hours to 3 months.
  • Position Trader: Hold trades anywhere from 3 months to a year.
  • Buy-and-Hold: Hold trades for more than a year.

Here I have a 1-year chart on Apple (APPL). This is a good time-frame for swing-traders and position traders alike. This is what I call the default chart. The only indicator currently on this chart is volume and the chart has no pattern lines to it. I will walk you through the steps to making your chart into a technical analysis powerhouse.

How to Trade Using Technical Analysis

Chart Programs That You Can Use

There are many chart programs both free and expensive monthly costs. I will share with you my two favorite programs. Both of these programs have a ‘paper trade’ option where you can trade ‘fake money’ and try any new strategies you’ve learned from Income Adviser without loosing your hard earned money.

  • Tc2000: Fantastic program! This program has a monthly fee but it’s not a crazy amount much. I used this program for years and it taught me how to use technical analysis to my advantage.
  • ThinkorSwim: If you are looking for a free program this is definitely the one! However, you must have a TD Ameritrade account in order to use it. It has almost all of the bells and whistles that TC2000 has and it is linked to your trading account so you can make trades from this program.

Adding Indicators

Step 1 – Adding a MACD indicator. Research how to do this on whatever program that you are using. The MACD is a very popular indicator amongst technical traders. This indicator is used to determine momentum. When you see a reversal in the MADC trend (was moving one way and now moving the other way) that shows a change in momentum for the stock’s price.

Step 2 – Adding Stochastics indicator. Stochastics are used to determine whether a stock is oversold or overbought. When a stock is oversold that means that more selling than buying has occurred for some time now and the stock, based on history, is ready to reverse. And vice versa with overbought. When used with MACD you can increase your chances of being right for a trend reversal. When both the MACD and STOCH are showing a reversal in the trend you may want to make your move and buy or sell some shares for that stock.

Step 3 – Overlapping Volume: To give yourself more room to see the other two indicators it is best to overlap your volume under your chart. Volume is used more as a confirmation tool. Once you see both indicators showing a trend reversal look for an increase in volume to confirm that assumption. If a stock is going up and the volume is decreasing that means that the uptrend is not going to last, and you may want to exit your trade.

How to Trade Using Technical Analysis

Finding Support and Resistance

When trading using technical analysis, indicators are important, but nothing is in comparison to finding the support and resistance of a chart. Support in a chart is when the price of a stock hits support it usually bounces back up. Resistance is the exact opposite, sending the price down once hit. I will draw some support and resistance lines to show you just how incredible it can be in determining the direction of a stock.

How to Trade Using Technical Analysis

As you can see, not every time, but most of the time, when Apple’s price hits a support line the price bounces up and vice versa for resistance. With that said, yes, patterns do not work every time so you must have things in place that prevent huge losses. A popular rule amongst successful traders is the 6% rule. Once your investments have had a loss of 6% its time to sell everything and wait for a better time to re-enter the trade.

Now you can try this for yourself! Try to find some stocks and identify their patterns and when a reversal is probably going to happen.

Taking It from Here

Play around and invest “paper money” to try out these new methods that I’ve taught you. Paper money is fake money that you use to test out methods and new strategies. When trying something new always try your first few trades with ‘paper money’!

If you would like to dig deeper into technical trading here are some resources that I have used to get me comfortable and skilled enough to make money using technical analysis.

Technical Analysis for Dummies

Harry Boxer Identifying Winning Chart Patterns


Stock Trading for Kids, Students, and Beginners