Stock Market Lesson #3

Stock Market Lesson #3

Technical indicators:

Todays lesson is explained best with an example. Let´s try it with a stock named Energous Corp (WATT). All these analysis can be done with Yahoo Finance so you can all do it with me.

Now you can add some indicators to the graph.

For example the Simple Moving Average for 21 Days (blue) and the SMA for 50 days (red).

To understand what this means you have to know that the wider the real share price is to the SMA the higher is the possibility of a market correction. So to consider a long position in a stock it might be better if the market price is currently under the SMA(21).

But this method is not really efficient because you would get to many false signals. Because of that we now ad the 50 day SMA.

Now you can get into a long position when the SMA21 (blue) crosses the SMA50 (red) upwards you´re going long and if the SMA 21 crosses the SMA50 downwards you´re going short or close your long position.

It maybe easier to understand by looking at this picture.

What you can see here this method works perfectly in a trend but does not really help in a fluctuating market. This means you´ll need another filter, for example the SMA90 or you use another indicator for sideways markets.

To make better forecasts we now use the Relative Strength Index (RSI) for the periode of 10. This indicator will be shown under the chart.

This methode is not really suitable for trends because there is nearly no possible entry point.