How Stock Brokers Do a Technical Analysis of Stocks

By: Jake Hyet


All stocks can be analyzed by technical analysis. Technical analysis of stocks is relatively easy and is a common practice in trading. It helps anticipate future price movements in securities by measuring the ups and downs in price and volume (the amount of shares traded). Technical analysis is more apt to be correct if the price and volume fluctuations correspond with each other. Since the use of free stock charts has become widespread, using technical analysis has been relatively easy, especially with the help of a stock broker. Here are some tips about how stock brokers manage to pull this off:

1. Assess price barriers in the stock chart.

A price barrier is a price that a stock is historically unable to go above or below. You can find price barriers easily by using a free stock charting service such as Yahoo Finance or Stock Charts.

2. Analyze the general price trend of the security.

Does the stock have a distinct upward or downward trend or is it volatile and unpredictable? If a stock lacks a clear price trend, then you should consider not trading it.

3. Examine the volume fluctuation of securities.

If the volume is increasing, the stock is likely to have a sharper price increase or decrease, but the stock is more liquid.

4. Watch for the stock to rise above or fall below the price barrier.

Technical traders may purchase a security when the stock rises above the price barrier and short sell a security when it falls below the price barrier. Short selling is the act of selling borrowed securities and then buying the securities back at a later time to reimburse your broker for the borrowed securities.

5. Find a good time frame.

Don't forget that when doing technical analysis of stocks, you need to find a time frame that suits you. You also have to be clear on the type of trader you want to be. If you are just starting out and are completely new to stock trading, begin by doing "swing trading" or "position trading." This means that you will be holding onto your trades for several days or several weeks, even for as long as a few months. The lowest time frame you should use to make trades from is the daily chart. You can determined the trend by examining weekly charts.

6. A broker uses the MACD (moving average convergence divergence) system.

The MACD involves a simple crossover system. One of the lines used is called the signal line. When the other line crosses above the signal line, this is called a "buy" signal. When it crosses below the signal line it signals "sell."

7. Another technical indicator a broker might add is the two-period RSI (relative strength indicator.

It's a very easy to use technical indicator that, makes for an efficient system. When the RSI is over 90, the market is overbought and you need to look for trade to go short. When it is below 10, the market is oversold and you should look to go long.

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Jake Hyet is considered an expert in technical analysis of stock market, having been a stock market broker for more than a decade. He writes extensively about the stock market and has had numerous articles published.

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