Technical Analysis Tips for the Everyday Investor (Part 2)

If you haven’t already read Part 1 of this series then make sure you do so before reading on. In Part 2 of “Technical Analysis Tips for the Everyday Investor” we want to show you how to read the trend in a product which you may be looking to invest in. By simply reading the trend we believe that you can increase the odds of the investment working out for you. If you can align your fundamental view with a technical view then you’ll be much better off than if these two views are conflicting.

So, let’s start off with a simple definition of an uptrend and a downtrend. An uptrend is defined as price making higher highs and higher lows whereas a downtrend is defined as price making lower highs and lower lows. The images below will help you to visually see what the difference between an uptrend and downtrend is. What we want to make sure we do when looking to invest in a stock is to only buy a stock when it’s in a confirmed uptrend and to avoid buying a stock when it’s in a downtrend. In terms of what timeframe chart you want to base your decisions off, we recommend using the daily, weekly or monthly charts depending on how long you intend on holding the stock for. If you can get all of these time frames in agreement then that's even better. 

Let’s take Wal-Mart as an example. You as an investor have heard a tip that Wal-Marts earnings are improving, therefore you are interesting in buying shares. You do some research and you confirm your fundamental reasons for wanting to buy shares in Wal-Mart. Instead of then calling up your broker and buying shares in Wal-Mart, what we would say would be to go and check the trend of the Wal-Mart stock chart to see if the technicals agree with your fundamental reasons. Check out the weekly Wal-Mart share price chart below and ask yourself whether that’s in an uptrend or a downtrend?

The answer is that the weekly chart is showing a strong downtrend as price has been making lower highs and lower lows.  This would then put us off from buying shares in Wal-Mart for now, until we can see a change of trend from downtrend to uptrend. Once that happens, we’ll know that the fundamentals and technical’s are in agreement so we can then buy shares in Wal-Mart.  

By following this simple procedure described above, we improve the likelihood that we are investing with the momentum of the market behind us. 

Happy Investing!

P.S. Check out our weekly free webinars to start learning more about how we use technical analysis: www.tradewithprecision.com/freewebinars  

The TWP Team