So far in the Young Investors series, we’ve covered a lot of big-picture advice on how to take control of you investing future, and we’ve also looked at dividend stocks and funds to start with.
But as Charles Sizemore recently discussed, young investors needs to be sure to experiment with plenty of investment flavors to find out which style works for them. With that in mind, we decided to give you a taste of another popular investing strategy: technical analysis.
Technical analysis uses the historical performance of stocks — both through price and volume — to predict future performance. My favorite analogy comes from the best starting point for investing vocab: Investopedia. The site explains:
“In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, the technical analyst’s decision would be based on the patterns or activity of people going into each store.”
To get a better grasp on the basics, I chatted with Jon Markman — the editor of Trader’s Advantage. He explained that analyzing charts can shed light on the psychology of the stock using various metrics.
Click to Enlarge In simplest terms, a growth stock that looks like a “buy,” according to technical analysts, will be trading above 20-day, 50-day and 200-day moving averages. Most technical analysis indicators can be found on a Google Finance chart, as seen to the right with the example of Facebook (FB).
As you can see, there are numerous indicators you can use — but the bottom line, Markman explains, is to understand whether the stock is in an uptrend or downtrend. He summed things up by saying:
“It’s a heck of a lot easier to go long a stock that is already rising and expecting to keep on rising, and a lot harder to see a stock coming down, starting to move up and guessing that it might keep coming up. If you have growth mentality and short-term perspective, stick with stocks that are already going higher — don’t bottom-fish.”
To find out more about technical analysis, check out the video above, the trading section of InvestorPlace, our “trade of the day,” or the resources (listed below) that Markman mentioned during our interview.
Technical Analysis Books:
- The New Day Trader Advantage, Jon Markman
- Online Investing, Jon Markman,
- Secrets for Profiting In Bull Markets and Bear, Stan Weinstein
- How to Make Money In Stocks, William O’Neil
Like what you see? Sign up for our Young Investors e-letter and get practical investing advice delivered to your inbox every week!