We covered earlier that there are two methods of analysis: fundamental and technical. So, let’s get into technical analysis.
You might have heard others talk about technical analysis. Recently, it has been a more common way for investors to evaluate stocks and attempt to capture short-term gains. Technical analysis involves using historical pricing and volume data to forecast the direction of a stock’s price.
It is similar in a way to fundamental analysis in which your goal is to find undervalued. I mean that will always be the goal, but technical analysis takes a different way of finding those undervalued stocks.
Before we get any more technical, let’s cover some important terms. First, volume is the number of shares traded during a duration of time. High volume can signal that the stock is being actively traded, for good or bad. High-volume stocks are considered volatile. Volatility refers to a stock fluctuation in value. The higher the volatility, the more a stock price will go up and down.
Technical time! To find undervalued stocks using technical analysis, investors use a variety of different indicators and charting patterns to provide signals of when to buy or sell. Indicators are quantitative (numbers) metrics while charting patterns are qualitative (observation) and are assumed to repeat over time.
There are a ton of different indicators. Moving average, RSI, MACD, there truly is an endless number of indicators available to investors and Bumper is working on bringing them to you! The indicators are simply complex mathematical formulas that use price, volume, and other data to push out a supplement to a chart. It is then up to an investor to determine the potential outcome of a stock’s price using a variety of indicators.
There are many chart patterns too and it is up to an investor to recognize these patterns. The most basic ones are support and resistance. A support level is a price level a stock has not fallen below for a period of time. If you have a stock that keeps jumping up to $12 or $14 but then frequently drops down to $10, then $10 could be the stock's support level. Resistance is just the opposite. It is the price that a stock can not go above for a period of time.
Overall, technical analysis is time-sensitive and requires investors to act quickly to capitalize on an opportunity. Before you can do that, it will take time and practice to learn the pattern and understand the context of each indicator.
This style of investing is often used by active traders to capture short-term gains. However, this comes with elevated levels of risk since it requires you to actively trade.
We will dive much deeper into parts of technical analysis later on, but that is the quick overview. Next up, we will describe how to pick stocks as a teen.