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It is no easy task for the average retail investor to beat the market by analyzing and investing in individual stocks.
Keith Lichtman, an investment advisor at Maycomb Wealth Advisors LLC in Atlanta, says it’s okay for investors to learn the basics of stock analysis, but most aspiring stock traders don’t realize the unlikely prospect of sustainable success.
“Over a long-term horizon, say five, 10, 15, 20 years and beyond,” says Lichtman, “it is extremely difficult to pick out winning stocks.”
However, if you feel like learning more about stock analysis, it is best to do it responsibly. And while Lichtman doesn’t recommend it to his clients, he says that investors who have already funded a long-term investment plan build on high diversification Low-cost index funds might consider a “casino fund” that does not represent more than 5% of its total portfolio. Here you could possibly try to review individual securities and invest in them.
So if you are, here’s how to understand stock market analysis.
Types of inventory analysis
There are two main types of inventory analysis: basic and technical.
Fundamental analysis of stocks focuses on the company itself, trying to determine the true fair value of a company’s stock price based on its recent earnings, past earnings growth rates, projected earnings, debt, and other financial and accounting measures. By examining these metrics, fundamental analysts predict where they think the stock price could be based on the company’s performance. This article focuses on technical analysis, but it can also be explored NerdWallet’s Guide to Fundamental Analysis.
Technical analysis focuses on the behavior of the stock price itself. A technical analyst can identify patterns in the historical movements of a stock price, look for repetitions of those patterns, and make investment decisions based on whether these patterns occur. Often times, traders use a combination of the two studies to make their investment decisions.
Technical analysis of the stocks
Support and resistance
Technical analysis is a fun thing. It’s based on mechanical patterns, but those patterns wouldn’t exist without human emotions. To understand understanding and resistance, one must learn to read the emotions of investors.
The support shows a price that traders believe is a good place to buy as they do not see it as likely that the stock price will fall much lower in any given time period. Imagine a stock whose price fluctuates between $ 80 and $ 120 in a matter of months. If the stock price declines to around $ 80 and then rises again, it could be said that there is a support line of $ 80. The trading software draws an actual line connecting the lows so that you can spot this trend.
If the stock price fell to $ 80 one week, but only dropped to $ 90 another week, and dropped to just $ 100 the next week, you could be pulling up a diagonal support line connecting those rising lows. A trader can use this trend to expand the support line into the future, guess what the next low might be, and then decide to buy in.
When support is used to predict lows, resistance is used to predict highs. If the same example shows that this stock hits $ 120 multiple times and then falls, it could be said that there is a resistance level at $ 120 that could signal traders that $ 120 might be a time to sell.
If instead that high climbs from $ 120 to $ 110 and then to $ 100, you can connect those highs to a downtrend line. A trader may see this as an opportunity to sell as high as possible before the stock falls, or to avoid the stock entirely.
Below are two graphs that explain the support and resistance at different intervals. The graph on the left shows the weekly prices of Apple stock over the years and shows two diagonal support lines (green) and one diagonal upward resistance line (red).
The graph on the right shows the daily prices for a few months and shows a horizontal support line and a diagonal resistance line to the downside.
Note that drawing these lines accurately will require additional analysis, such as: B. Finding moving averages or applying multiple lines to the chart to find a common thread. It’s not dissimilar to chasing a hurricane – you run multiple scenarios to find the most likely path. And just like storm tracking, forecasts can be extremely inaccurate for many reasons.
Read candlestick charts
Candlestick charts are a convenient way for investors to see the open, closed, high, and low prices for a given time period. And this period is different: if it is a trading day, these metrics are displayed side by side for each day over the course of weeks or months. If the period is one minute, you will see the opening, closing, high and low of each minute over a shorter period, e.g. B. an hour.
The basic components of the candle holder are the body (formally referred to as the “real body”) and the wick (known as the “shadow”). This is how it works:
When the price goes up after opening, the body goes up (often colored green). When the price falls, the body falls (often colored red).
The end of the wick marks the highest or lowest price for that period. When the body hits a high but falls back lower, the wick shows the difference between that high and the current price. Similarly, if the body drops to a low but then rises again, the wick shows the difference between that low and the current price.
If there is no wick, it means that the price ended the period on either the high or the low, depending on which wick is missing.
Below is a six month chart of Apple stock in candlesticks, with each candle representing a trading day.
By studying the changes in the shape of the candle from period to period, certain patterns can develop that could indicate the direction of price in the short term.
To get an overview of the price of a stock, you can look at the 52-week range, which shows the highest and lowest prices for the last 52 weeks. Looking at a stock’s current price versus its 52-week high or low can help investors understand the severity of the day’s price changes, says Kenny Polcari, managing partner of Kace Capital Advisors and a market analyst for CNBC and Fox Business Network.
For example, let’s say the 52-week high is $ 128 and the stock closed the day at $ 125. Even though it closed, it is still much closer to the 52-week high than the low.
“That would make you feel like the stock is strong and will stay strong even though it was down $ 3 today,” says Polcari.
Volume vs. Average Volume
The volume shows investors the number of trades that took place on that day. In general, this is a way to measure liquidity (how fast the stock can trade without unduly affecting the stock price), but other numbers may be found in the numbers. If there’s a big difference between daily and average volume, there may be something wrong with the stock worth exploring, Polcari says.
You can see how volume and price are related by looking at the green and red bars at the bottom of a stock chart. The higher the bar, the higher the volume. Green bars indicate that buyers have been more aggressive, while red bars indicate that sellers are putting pressure on the stock price.
“If you look at the chart and all of a sudden you see green, green, green, and no red, it would mean that the stock is absolutely accumulating, which means that the majority of orders are buy orders. People are aggressive and want to get into this stock, ”says Polcari. “It will mainly be representative of the institutional volume. It won’t be representative of retail volume. But that’s still a good sign. “
Conversely, Polcari concluded that seeing red is a sign of distribution, meaning that people – usually institutions again – are getting out of the inventory and lowering the price.
Is Stock Picking Right For You?
This is only the beginning of a deep, deep rabbit hole for technical stock analysis. And while you may be tempted to put your spotlight on and explore further, keep Lichtman’s warnings in mind: If you are into short-term stock selection and day trading, you will have to compete against institutions that spend millions of dollars on resources and technology to get an edge over other institutions that spend millions of dollars on resources and technology. And you are the private investor who is right in the middle of it all with a smartphone and a free trading app.
“It’s almost like putting a knife in a shootout,” says Lichtman.
If you’d rather not show up for a fight, there is a good rule of thumb to follow long-term index fundsand call it a day.
Disclosure: The author held no positions in any of the above securities at the time of publication.