[MUSIC PLAYING]
The term "technical analysis" might sound a little, well,
technical, but it's actually pretty simple.
Essentially, it's a strategy an investor may
use to examine an investments chart
and attempt to forecast its future performance.
Some investors may use technical analysis
to attempt to identify when to enter or exit a stock position.
When performing technical analysis,
investors can use a variety of techniques and tools
to analyze a chart.
In this video, we'll focus on a few technical analysis
basics including trend, support and resistance, price patterns,
and technical indicators.
Let's start with the first technique, trend.
Trend is the general direction a stock's price is moving.
There are three kinds of trends--
up, which is a series of higher highs and higher lows;
down, which is a series of lower highs and lower lows;
and sideways, which has roughly equal highs and lows.
Some investors determine a stock's trend
by identifying the direction of its highs and lows.
Trend may be important because many investors believe
that a stock will generally continue in the same direction
it's been going.
These investors would anticipate a stock with a strong uptrend
to continue to rise, while one with a strong downtrend
will continue to fall.
Some investors draw lines to attempt to identify the trend.
Investors can also draw lines to connect highs and lows.
These lines are known as support and resistance
levels, the next technique we'll discuss.
Support and resistance are price levels
that the stock has had trouble breaking through.
If a stock breaks through support or resistance,
it could be a signal to enter or exit.
For example, suppose a stock breaks
through resistance, which is the level it repeatedly pulled back
from in the past.
Because it broke through resistance,
an investor may believe that there's
a good chance that the stock will continue to rise.
So broken resistance may be a good time to enter.
On the other hand, if the stock fell past a support area,
it may continue to fall.
This could be considered a good time to exit.
After connecting support and resistance levels,
a stock's price movement may resemble a certain shape.
These shapes are called price patterns
and are another technical analysis technique.
Price patterns can build on support and resistance,
allowing investors to attempt to predict more specific movements
and try to point out even more precise entry and exit signals.
There are many different price patterns.
Some examples include simple shapes like triangles or flags
and more complex patterns like head and shoulders
or triple tops.
Let's look at an example.
This is called an ascending triangle,
and it forms when a stock's highs are hitting resistance
while its lows are steadily rising.
Some investors might interpret the narrowing between the highs
and lows as a signal that the stock's
about to break through resistance.
If it does, the stock's price is expected to rise in value right
after the breakout, but not all investors exclusively
use support and resistance and price patterns.
Drawing lines and finding shapes can be subjective.
Because of this, some investors may use technical indicators.
Technical indicators are graphical representations
of chart data.
Each indicator displays chart data, like price and volume,
in a unique way, giving investors another perspective
of the stock's performance.
Because technical indicators are created
using formulas and data, they may give investors
a more objective way to examine a stock's performance.
A common technical indicator is a moving average line.
This indicator averages the stock's price
over a period of time and plots it
as a line, which can help determine the overall trend.
Moving averages can be calculated
for any period of time, but one of the most common is 50 days.
So what does a moving average tell you about an investment?
Imagine a stock's price crosses above its 50-day moving
average.
This may indicate that the stock is outperforming
its recent history.
This could be an entry signal.
Similarly, if the stock begins to fall and dips
below its moving average, it could be an exit signal.
Moving average lines are only one
of many technical indicators investors may use.
Other common indicators include price envelopes,
bullinger bands, stochastic oscillators,
and the relative strength index.
At this point, we've covered some basics
of technical analysis.
One thing to keep in mind is that technical analysis can
help you identify potential entry and exit signals,
but it offers no guarantee of success.
After all, there is no way to predict the future.
We've only covered the tip of the technical analysis iceberg.
Learning how to use the techniques and tools we've
discussed, as well as the many others out there,
can advance your technical analysis skills.
[MUSIC PLAYING]