Mastering technical analysis: tools for Investor traders

Investing in the stock market can be daunting, especially for beginner investors. With the constant fluctuations and ever-changing market conditions, it’s difficult to determine the best time to buy or sell stocks, which is where technical analysis tools come into play. Technical analysis involves using historical price and volume data of security to make investment decisions. In Australia, various technical analysis tools are available to assist investors in making informed decisions. This article will discuss the most commonly used tools by investor traders in Australia.

Moving averages

Moving averages (MA) are among the most widely used technical analysis tools. It is a trend-following indicator that helps identify price trends by smoothing out fluctuations in price data. MA is calculated by adding the closing prices of a security over a specified period and then dividing it by the number of periods.

Two popular moving averages are the simple moving average (SMA) and the exponential moving average (EMA). The SMA assigns equal importance to all data points, while the EMA prioritises recent data points, making it more sensitive to price trends.

Traders use moving averages to identify support and resistance levels and potential entry and exit points for trades. A crossover of short-term and long-term MA can signal a change in trend direction, while a convergence or divergence between the price and MA can indicate a potential reversal.

Relative strength index (RSI)

RSI is a momentum oscillator that measures the speed and change of price movements. The indicator evaluates the average gains and losses within a defined timeframe and represents them on a scale of 0 to 100. A value above 70 suggests an overbought situation, while a value below 30 indicates an oversold condition.

Traders use RSI to identify potential overbought or oversold levels, which may suggest an upcoming price reversal. They also use divergences between RSI and price movements to confirm trend changes.

Traders often combine RSI with other technical indicators, such as moving averages, to confirm signals and make educated trading decisions.

Bollinger bands

Bollinger bands consist of three lines – the middle line (simple moving average), upper band (SMA + 2 standard deviations), and lower band (SMA – 2 standard deviations). These bands measure volatility and identify potential overbought and oversold levels.

When the price moves closer to the upper band, it suggests an overbought condition, while a move towards the lower band indicates an oversold condition. Traders also look for breakouts from the bands, which may signal a potential trend reversal or continuation.

It is essential to note that Bollinger bands are not a standalone indicator and should be used in conjunction with other technical tools to confirm signals.

On-balance volume (OBV)

OBV is a volume-based indicator that measures a security’s cumulative buying and selling pressure. It adds the volume on up days, subtracts it on down days, and then plots the result on a chart. Traders use OBV to identify potential trend reversals and confirm price movements. A divergence between price and OBV can signal a likely trend change.

Traders also look for breakouts from the trend line of OBV, which may indicate a continuation or reversal of a price trend. It is essential to note that OBV should be used in conjunction with other technical indicators for more accurate analysis.

OBV is available on various trading platforms, including Saxo Markets, making it easily accessible for traders in Australia.

Fibonacci retracement

Fibonacci retracement is based on the theory that markets tend to retrace a predictable percentage of a previous move before resuming its original direction. These levels are calculated using the Fibonacci sequence – 0%, 23.6%, 38.2%, 50%, 61.8%, and 100%.

Traders use these levels to identify potential support and resistance levels and entry and exit points for trades. A retracement towards a Fibonacci level may indicate a possible trend continuation, while a break of a Fibonacci level could signal a trend reversal.

However, it is essential to note that Fibonacci retracement levels should not be used as the sole basis for trading decisions but should be combined with other technical tools.

Ichimoku Cloud

Ichimoku cloud, also known as Ichimoku Kinko Hyo, is a versatile technical analysis tool that provides several lines of support and resistance levels, along with a cloud or area indicating trend direction. Japanese journalist Goichi Hosoda developed the tool in the late 1930s.

The Ichimoku cloud incorporates five lines – Tenkan-sen (conversion line), Senkou Span B (leading span B), Kijun-sen (baseline), Chikou Span (lagging span), and Senkou Span A (leading span A).

Traders leverage the power of cloud technology to detect and analyse potential support and resistance levels, determine trend direction, assess momentum, and pinpoint optimal entry and exit points for their trades. When the price is above the cloud, it indicates an uptrend, while a price below the cloud suggests a downtrend.