Use these charting techniques to maximize profits
Charting, or technical analysis on historical price movement, is very beneficial to any trader or investor. Today, I will cover the basics of charting in order to help predict the price movement of a security and formulate entry and exit points. I use candlestick charts because they tell the most about the current battle between bears and bulls. Here are the basics of a candlestick formation:
As you can see, candles show the intraday range of a stock's price, as opposed to just the open and close. This helps determine trends and support/resistance levels.
Support and Resistance
A support level is a price level that a stock has historically had a hard time falling below. Support levels are typically entry points for buyers, but if support gives out you must sell because the stock can go into free fall.
A resistance level is the opposite: a price level that a stock has a hard time surpassing. The more a stock is rejected at resistance level, the more formidable that level becomes. Technical traders typically buy at support, and sell at resistance. A trend is likely to reverse at support and resistance levels.
Determining Trends
Drawing a trend line is an easy tool. These lines are lines drawn over highs or lows (at the end of the candlestick) to show the prevailing direction of price. Trends lines are visual representations of support and resistance. If the stock breaks through its trend line, momentum in either direction (up or down) has increased. If the lines point upward, there is an upward trend present. The opposite is also true in that if they point downward, there is a downward trend present.
Chart Indicators
Many traders like trading solely off of support, resistance and trend lines, but you always have to take chart indicators into account. My favorite indicator is the Moving Average Convergence/Divergence indicator, also known as the MACD. The MACD is a momentum indicator that gives a bullish signal when the signal line crosses over upward and a bearish signal when the signal line crosses over downward. The MACD also shows a weakening trend when there is consistent divergence. This helps analyze trend strength, reversal opportunities, and bullish/bearish signals.
Two other indicators that you should always add to your chart are the 50-day Simple Moving Average and 200-day Simple Moving Average (SMA). These lines act as support and resistance for stocks and be great for bottom bounce entries, which are.... When the 50-day SMA crosses over the 200-day SMA, it gives a bullish signal. When the 200-day SMA crosses over the 50-day SMA, it gives a bearish signal.
Practical Example--Virco Manufacturing (VIRC)
VIRC Chart showing Support/Resistance, MACD, 200-Day SMA and 50-Day SMA
Let's put the above definitions into practice. Virco Manufacturing Corp. (VIRC) was The Bowser Report’s June 2015 Company of the Month. Shares soared off of the major support level (lowest green line) and the MACD also crossed over upward, which would have been great entry from a technical standpoint. Since you buy at support, you could have added more shares at the next support level on the way up. The 50-day SMA was trading above the 200-day SMA, indicating a bullish signal. The next signal was bullish from a break of the first resistance level. Then the stock was rejected multiple times at the next resistance level, leading to a bearish signal. The MACD downward crossover was the last bearish signal.
Summary
Charts are not for everyone. However, understanding charting basics can help you to become a smarter investor. And, the more you know, the greater your chances of profiting. In the most recent newsletter (July 2015), The Bowser Report used technical indicators in the Company of the Month writeup to illustrate support as an ideal entry and resistance as a short-term price target. There is much to gain from chart analysis. Practice yourself by choosing a few charts to work with. And, let us know in the comment section if you have any questions!
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The Bowser Report is a monthly financial newsletter that specializes in small stocks trading for $3/share or less. Our goal is to provide the individual investor with relevant information on microcap stocks. Each month, we recommend a new company, provide information on past recommendations and report news surrounding the microcap marketplace.
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Information in this blog post may contain references to past Bowser recommendations. This blog post contains no recommendations, and instead relies on data gathered on past recommendations from sources thought to be reliable.
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