How to Use Technical Indicators
Use Technical Indicators to Take the Guesswork Out of Buying Stocks: A Step-by-Step Guide
Let’s be honest—when you’re just starting in the stock market, it can feel like trying to read a book in a different language. All the charts, data, and numbers can be intimidating, and you might be thinking, “How do I know when to buy or sell without playing a guessing game?”
The good news? You don’t have to guess! Technical indicators are like your GPS for stock trading, helping you navigate the market with confidence. And I'm here to guide you every step of the way. Let’s break it down into bite-sized pieces, so you can start making smart moves without feeling overwhelmed.
What Are Technical Indicators?
Think of technical indicators as your secret weapon in the stock market. They’re mathematical tools that analyze a stock's price movements, volume, and trends. Instead of trying to predict where a stock’s going based on gut feeling, you’ll have clear signals telling you when it might be a good time to jump in or get out.
Why Bother with Technical Indicators?
Great question! Here’s why you’ll want these tools in your trading toolkit:
Identify trends like a pro: Get a clear picture of whether a stock is heading up, down, or just hanging out in the same spot.
Time your trades with precision: Know exactly when to make your move, so you don’t end up buying at the top or selling at the bottom.
Cut through the noise: Rely on solid data instead of emotions, so you make decisions that actually make sense.
4 Technical Indicators Every Beginner Should Know
Now, let’s dive into the three indicators that will make you feel like a stock market wizard—even if you’re just getting started!
1. Moving Averages (MA)
In simple terms: Moving averages smooth out the price data to help you spot the overall direction of the stock’s trend. The two most common types you’ll hear about are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
How to use it:
Buy signal: When the stock price moves above the moving average line, it’s like a thumbs-up that says, “This stock might be heading up!”
Sell signal: When the price dips below the moving average line, it’s a gentle nudge to consider selling before it goes lower.
Tip: For beginners, start with the 50-day or 200-day Moving Average to spot those broader trends.
2. Relative Strength Index (RSI)
Why it matters: RSI is a momentum indicator that measures how fast a stock’s price is moving. It’s like your stock’s temperature gauge—telling you if it’s overheated or cooled off.
How to use it:
Buy signal: If the RSI falls below 30, the stock could be oversold, which might mean it’s a bargain waiting to be snatched up.
Sell signal: If the RSI climbs above 70, it might be overbought, which means it’s a good time to think about selling.
Tip: Combine RSI with other indicators for an even clearer picture. It’s like having multiple sources to verify a great restaurant recommendation!
3. Moving Average Convergence Divergence (MACD)
In a nutshell: The MACD indicator helps you spot changes in a stock’s momentum, telling you when it might be gaining or losing steam.
How to use it:
Buy signal: When the MACD line crosses above the signal line, it’s a sign that the stock might be ready to make a move up.
Sell signal: When the MACD line drops below the signal line, it could mean a downtrend is coming.
Tip: Use the MACD histogram to gauge the strength of the trend. The bigger the bars, the stronger the momentum!
4. Stochastics
What is it? Stochastics is another great momentum indicator that compares a stock’s closing price to its price range over a period. It’s similar to RSI, so it’s like having a sidekick for your mood ring!
How to use it:
When to Buy: If the Stochastics fall below 20, the stock may be oversold and ready for a comeback.
When to Sell: A reading above 80 suggests the stock might be overbought and could be headed for a correction.
Tip: Look for crossovers between the %K and %D lines for added confidence in your buy or sell decision.
Step-by-Step Guide to Using Technical Indicators
Ready to take action? Here’s a step-by-step plan that’ll help you put these indicators to work:
Pick your tools: Start with one or two indicators—like Moving Averages and RSI—to keep things simple.
Use Multiple Indicators: Don’t put all your eggs in one basket. Combine at least two indicators to confirm your decisions. It’s like having a buddy to help you make tough choices!
Check the trend: Use these indicators to get a feel for the stock’s overall direction. Are we going up, down, or sideways?
Confirm your signals: Don’t just rely on one indicator. Use a couple to double-check that buy or sell signal before you commit.
Place your trade: With all this data backing you up, you can make your move with confidence—no second-guessing allowed!
Practice Makes Perfect: Test these indicators on historical stock data before you dive into real trading. It’s all about building your confidence!
Stay Disciplined: Emotions can run high in the stock market. Stick to your strategy and the signals provided by the indicators. Trust me; it pays off!
Let’s Wrap It Up
Using technical indicators might sound fancy, but they’re actually your best friend when it comes to making smart trading decisions. They take the guesswork out of the equation, so you don’t have to cross your fingers every time you hit "buy" or "sell."
Subscribe Today
Jumpstart your personal investing.
Join InvestPro™ and you’ll get exclusive access to our InvestPro Reports that show you what to buy and when to buy it. You’ll receive our cutting-edge research and analysis, as well as access to each company we invest in and each trade we make.
Choose from our 6 month or 1 year options.