Technical analysis is the study of a stock’s chart and it is very helpful in determining when to buy or sell a stock. There are literally hundreds, if not more, ways to approach this technique; but I belong to the old school that believes simple is better. Personally, I do not like to put a lot of studies up on my charts. Some traders (typically day traders) will have many studies on their chart but that can make it very hard to see the trend of the stock (the most important part). Below, I will describe what I believe to be as the foundation to technical analysis.

First, the trend is king. The trend of the stock trumps all. If the stock is trending down, chances are it is going to continue going down. There are three main chart trends: the stock is either trending up, down, or sideways (channeling); and investors can play each trend.

Next, are support and resistance levels. These levels are key in determining when to enter or exit a stock. A support level is the approximate price on the chart (dip) that the stock seems to fall to but not go any lower. Usually, you can confirm this by pulling the chart back a little and using the cross hairs to match it up with previous support levels. A good time to exit or sell the stock is if the stock price falls lower than its current support level. Chances are, that if a stock falls through its support, it will continue to fall even lower.

A resistance level is the approximate price (peak) on the chart that the stock can’t seem to get over. Once a stock breaks out and rises above its resistance level, the old resistance level now becomes the stocks support level. A good time to buy a stock is when the stock price breaks out or rises above its current resistance level. The theory is that once the stock breaks out, chances are it will continue to go up.

And lastly, because I am a believer in simple is better, I am only going to touch on one study that I will use. Its called MACD (pronounced Mack-D) - Moving Average Convergence/Divergence. This study is useful for an early indication of what the stock is going to do. If the MACD crosses the signal line going down, this is considered and exit point. If the MACD crosses the signal line going up, this is an entry point. The histogram can confirm this by showing you how much momentum the stock has – the higher the histogram means the more pronounced or defined the MACD cross will be, and the more likelihood of the stock doing what it’s supposed to.

This, in a nutshell is technical analysis. Like I said earlier, there are literally hundreds of different paths to take here; but again, I believe in simpler the better. These tools should work just fine. And remember, technical analysis is more of an art than anything. Do not get caught up in exact numbers because it will never work. Try to take a step back and see the chart as a whole.