Stock Market Analysis Tools – Many investors analyze stocks based on their fundamentals – such as their earnings, valuation or industry trends – but the fundamentals are not always reflected in the market price. Technical analysis seeks to predict price movements by examining historical data, primarily price and volume.
It helps traders and investors navigate the gap between intrinsic value and market price using techniques such as statistical analysis and behavioral economics. Technical analysis helps guide traders to what is most likely to happen given past information. Most investors use technical and fundamental analysis to make decisions.
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There are generally two different ways to approach technical analysis: the top-down approach and the bottom-up approach. Often, short-term traders will take a top-down approach and long-term investors will take a bottom-up approach. Beyond that, there are five essential steps to getting started with technical analysis.
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The top-down approach is a macroeconomic analysis that looks at the overall economy before focusing on individual securities. A trader would first focus on the economy, then sectors and then companies in the case of stocks. Traders using this approach focus on short-term gains as opposed to long-term valuations. For example, a trader may be interested in stocks that broke out of their 50-day moving average as a buying opportunity.
The bottom-up approach focuses on individual stocks as opposed to a macroeconomic perspective. It involves analyzing a stock that looks fundamentally interesting for possible entry and exit points. For example, an investor may find an undervalued stock in a downtrend and use technical analysis to identify a specific entry point when the stock may bottom out. They look for value in their decisions and aim to take a long-term view of their trade.
In addition to these considerations, different types of traders may prefer to use different forms of technical analysis. Day traders may use simple trend lines and volume indicators to make decisions, while movement or position traders may prefer chart patterns and technical indicators. Traders who develop automated algorithms may have completely different requirements, using a combination of volume indicators and technical indicators to drive decision making.
The first step is to identify a strategy or develop a trading system. For example, a novice trader may decide to follow a moving average crossover strategy where he will track two moving averages (50 days and 200 days) on a particular stock price movement.
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For this strategy, if the short-term 50-day moving average crosses the long-term 200-day moving average, it indicates an uptrend in price and generates a buy signal. The opposite is true for a sell signal.
Not all stocks or securities will suit the above strategy, which is ideal for highly liquid and volatile stocks rather than illiquid or stable stocks. Different stocks or contracts may also require different parameter choices – in this case, different moving averages such as a 15-day and 50-day moving average.
Get the right trading account that supports your chosen security type (eg common stocks, penny stocks, futures, options, etc.). It should provide the necessary functionality for tracking and monitoring selected technical indicators, while keeping costs low to avoid losing profits. For the above strategy, a basic account with moving averages on candlestick charts would work.
Traders may require different levels of functionality depending on their strategy. For example, day traders will look for a margin account that offers access to Level II fees and market maker visibility. However, for our example above, a basic account may be preferable as a cheaper option.
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There may be other features needed to maximize performance. Some traders may require mobile notifications or access to trade on the go, while others may use automated trading systems to execute trades on their behalf.
Trading can be challenging, which means it’s important to do your homework in addition to the points above. Some other important considerations include:
Most inexperienced technical analysts focus on a handful of indicators, such as moving averages, the relative strength index, and the MACD indicator. These metrics can help determine whether an asset is oversold or overbought and therefore likely to face a reversal.
There are many ways to learn technical analysis, including books and online courses like Academy. Once you have a solid foundation, you can start testing your trading skills through paper trading before you start investing real money.
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Although it is possible to make money from technical analysis, using drafting strategies profitably requires a high degree of expertise and sophistication. Individual traders should exercise strong self-control and avoid emotional trading. They also need enough initial capital so they don’t go broke after a few bad trades.
Many investors use fundamental and technical analysis when making investment decisions, as technical analysis helps fill gaps in knowledge. By developing an understanding of technical analysis, traders and investors can improve their long-term risk-adjusted returns, but it is important to understand and practice these techniques before committing real capital to avoid costly mistakes.
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A vital part of a trader’s success, especially those who trade frequently, is the ability to appreciate patterns in trading data. Technical analysis techniques can take the emotion out of a trading decision. Technical analysis systems generate buy and sell indicators and help find new trading opportunities. With improvements in software and the speed of access to millions of data points over the past 15 years, technical analysis tools are available to all online traders.
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Most of the best sites that offer technical analysis tools also guide new traders to a basic understanding of essential concepts. Some of these resources are free or included in a broker’s platform, while others charge a fee. We take a look at technical analysis tools built into broker offerings and some independent sources.
Some of the brokers listed below use Trading Central, a third-party provider. A Canadian-based company, Trading Central offers excellent technical analysis tools that many brokers have integrated into their frequent trading platforms.
Trading Central’s tools automatically analyze price action to identify and interpret classic chart patterns and other critical conditions based on accepted technical analysis practices. These technical event announcements provide traders with insight into the strengths and weaknesses of the stocks under consideration.
These tools cannot be accessed by individual investors outside of brokerage platforms, but you will find their technology integrated into many active trading websites.
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Ally Invest’s brokerage platform includes a stock tracker powered by Trading Central. You can read the Ally Invest review.
Charles Schwab’s frequent trading platform, StreetSmart Edge, offers Screener Plus, which uses real-time streaming, allowing clients to filter stocks and ETFs based on a variety of fundamental and technical criteria, including technical signals from Trading Central (Recognia). Marketers can set the parameters most important to them and then integrate the Screener Plus results with their predefined watchlists. StreetSmart Edge custom charts include Trading Central (Recognia) pattern recognition tools.
On Power E*TRADE, the firm’s active trading platform, the Live Action scanner has over 100 predefined screens that scan the market in real-time for live prices and live analytical metrics based on technical, fundamental, earnings, sentiment and news events.
Oscillator scans built into Live Action help spot overbought or oversold stocks and explore additional opportunities for a client’s portfolio. Many of these integrated screens are unique to the Power E*TRADE platform.
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The Recognia scanner allows you to scan stocks based on events or technical patterns and set alerts when new criteria are met. You can use Power E*TRADE’s paper trading features to test your technical trading system. You can read the review of E*TRADE.
Active Trader Pro is Fidelity’s downloadable trading interface and offers a more in-depth feature set than is available through the website. Active Trader Pro provides advanced chart customization features and trading tools. The software can notify you of technical signals in the stocks you follow and provide alerts on open positions.
Fidelity’s web-based charting has integrated patterns and technical events provided by Trading Central. Advanced online charting allows viewing of 30 days of intraday data, extended trading hours and more than 60 fully customizable technical indicators.
With content consisting of articles, videos, webinars, infographics and recorded webinars, the Fidelity Learning Center includes a focus on technical analysis.
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Fidelity also offers weekly online coaching sessions where clients can join a small group to have in-depth discussions about options and technical analysis. You can read the Fidelity review.
Comprehensive custom charts are available on all Interactive Brokers platforms and include over 100 indicators and real-time streaming data. Trader Workstation (TWS), IB’s flagship trading platform, includes advanced technical analysis tools with over 120 indicators.
There is a demo version of TWS available that allows traders to learn how the platform works and test trading scenarios. In addition, it is possible to connect a third-party analysis platform
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