The Ultimate Beginner's Guide to Technical Analysis

Technical analysis—say it out loud. Even the name alone sounds intimidating and complex, doesn't it? Scary as it may seem, technical analysis doesn't have to be terrifying or "too hard" to understand.

Realistically, anyone who wants to invest in a company wisely should learn how to use technical analysis to do so. It's one of the biggest cornerstones of investing, and remains one of the best tools you can use to find stocks worth buying.

In the past, the only real way to learn technical analysis would be to work on Wall Street or to crack open books and learn it on your own. These days, though, you can simply learn it by reading a beginner's guide to technical analysis online.

So, are you ready to learn how to invest like Warren Buffett and other bigwigs of Wall Street? Here's what you need to know about this skill.

Technical analysis is a stock market trading strategy that is designed to help you figure out whether a particular stock is worth buying or selling. It's one of the most popular tools used in growth investing.

Rather than take in marketing rhetoric or looking at a company's fundamental values, technical analysis looks at past trends to figure out a company's future stance. By looking at a company's past actions, you can hopefully tell where they will be headed in the future.

Technical analysis can be pretty tricky at times, but since this is a beginner's guide to technical analysis, we'll explain the basics for those who want to give it a shot.

How does this type of analysis work?

The concepts behind technical analysis are based on the research of a man called Charles Dow. Dow created the Dow Theory, which says that stock history tends to follow patterns and repeat itself.

By taking a closer look at stock market patterns, investors will be able to profit off the patterns—even if the company itself isn't necessarily profitable.

There are two main categories of technical analysis.

Technical analysis is mainly performed in one of two ways:

• Top-Down. Top-Down analysis is the act of seeking out stocks that fit certain criteria that matches what you want to see on the long term ranges, then trying to find an entry point on shorter time spans. This is typically a short-term choice that day traders enjoy.
• Bottom-Up. Long-term investors may look at a Bottom-Up analysis. This involves taking a particular stock you have been considering buying, then taking a look at where you could have entry and exit points that could turn a profit. Bottom-Up approaches are used to find stocks that are undervalued which will later be sold at a higher price.

It's worth pointing out that technical analysis isn't a "one size fits all" endeavor.

There are multiple approaches that you can use to perform a technical analysis. You will need to tailor your strategy to the kind of stocks that you want to trade, as well as the skill set you have.

One of the easiest approaches you can take is to look at the moving averages. Generally speaking, if you notice that a stock's 50-day moving average is higher than its 200-day moving average, it's a sign that you should buy it up. Meanwhile, if you notice that the 50-day moving average has dipped, it's a sell signal.

Trends are what technical analysts want to look at. So, expect to look at a lot of charts with trends.

When reading a price chart, technical analysts don't pay attention to the details.

Instead of looking at every little shake and tremble in the stock price, most technical analysts will look at the over-arching trend that a stock has. The more long-term the investment is meant to be, the smaller the window of time they will look at when they analyze a stock.

For example, if day traders notice that the stock has been (somewhat) steadily increasing for the past three days or even the past three hours, they may want to invest in it. On the other hand, long-term investors will want to see the overall growth from year to year before they make a decision. That's why it is pretty easy to figure out how to trade stocks while working a full-time job.

Even though this is a beginner's guide to technical analysis, it's still worth pointing out that support and resistance bars are a huge part of most analyses.

Support and resistance bars show the trends for the top and bottom prices of a particular stock. A stock's lowest typical price will mark the support bar, while the highest typical price will be the resistance bar.

When a stock breaks through a resistance bar, it's considered to be a good buy. On the other hand, if it dips below a support bar, it could be a sign that the stock will plunge in value. Breakouts, as they're called, are major turning points in stock prices. (Negative turns tend to be called "breakdowns" by some traders, by the way.)

You want to buy stocks near support, and sell it near the resistance level.

When a stock breaks out from support or resistance zones, you can expect sharp moves in the direction the stock went.

The patterns of the stock market show that breakout points tend to have the same kind of behavior regardless of the industry or time. When a stock hits a breakout point, you will see higher trading volatility, and then in most cases, the stock will quickly move in the direction of the breakout.

For traders, this gives a far better way to determine whether you should buy, sell, or keep your stocks.

The more you read charts, the more you will notice repeat patterns.

This is only a beginner's guide to technical analysis, so we're not going to go over all the different patterns charts can have. However, we will mention a couple of trends worth keeping an eye out for.

• Triangles. If you notice that the support and resistance lines in a chart are starting to converge to a single point, you have a triangle. Triangles are a sign that a breakout or breakdown is about to happen. Generally, the breakout will happen in the direction of the flatter trend line.
• Gaps. Gaps happen when there's a sudden, significant decrease or increase in price.
• Triple Tops and Bottoms. If you notice that your chart's pattern hits the resistance or support beams three different times in rapid succession, be careful! This often is a signal of a major reversal in the trend.

Technical analysis isn't for all investment types, nor should it be used solo.

Technical analysis can and does work. If it didn't, traders wouldn't use it. However, there's a major caveat every investor should know when doing a analysis of a potential investment.

You see, trends can only go so far when it comes to discovering the direction of a company. At times, fundamental analysis could be a better indicator of a stock's success. That's why most professional investors tend to look at both forms of analysis before they make a decision.

Additionally, it's worth pointing out that technical analysis tends to work best with highly volatile, highly liquid investments like stocks and futures. It's something to keep in mind when determining how you should "vet" your investments.

Now that you've read through a beginner's guide to technical analysis, you have a better idea of whether or not you want to start using this form of analysis in conjunction with your trading style.

If you like the idea of using this method to pick your stock move, learning about technical analysis techniques is a wise decision. Might we suggest taking a course on Udemy to get the education you need?