There are many ways to analyzes stocks, but technical analysis is by far my favorite! This method of analyzing stocks uses charts to determine a stock’s future. You will learn in this post that there are certain indicators and chart patterns that will alert you as to whether a stock will be going up or down. A lot of other traders are utilizing this method as well and that is why it works! Stocks prices are based on the supply and demand of shares. When more traders are buying shares, the price per share will increase do to the high demand. When more traders are selling than buying the opposite will occur, and the stock price will decrease. So when you have thousands of traders looking at an indicator that is bullish (indicating a stock price should increase), they all buy and the stock price will increase, and this is why technical analysis works!

Support and Resistance

When analyzing charts, there are two terms that you must be aware of: support and resistance. You will see these terms everywhere (“there was resistance at $2…there was support at $1”). Basically these are the prices that a stock will seldom surpass or go under.

Support is the lower level, and as the name suggests, this is the price other shareholders still support the stock at. They don’t think it is worth any less and will continue buying so the price does not goes below this support.

Resistance is just the opposite. This is the price where traders are not confident the stock will go much higher and usually sell their stocks, keeping it from surpassing this price.

When a stock goes above a resistance or below a support, it will usually continue to do so. These actions are referred to as breakouts and breakdowns.

Breakouts and Breakdowns

A breakout occurs when a stock goes above resistance. When this happens, traders are considering the stock worth more and are confident that it will continue to go up. This is when you want to buy! Other traders will recognize this broken resistance and buy the breakout. The more traders that buy the higher the stock price will go and it is not uncommon for a stock to increase 20-30% in one day! Breakouts can last more than one day though, so if you’ve got patience some stocks will double or triple after a breakout!

A breakdown occurs when a stock goes below support. When this happens, traders no longer think a stock is worth as much and sell it. The amount of sell orders will outweigh the amount of buy orders causing the price to go down. In addition, many traders will have stop orders in at certain prices to limit their losses. This is is the time to short!

I’ll give you a quick example of how these stop orders could make you 20% in 10 minutes! Let’s say a stock is trading at $2.65, its support is $2.60, and traders have stop orders at $2.60, $2.55, and $2.50. Their brokers will be trying to sell their stocks at these prices when the stock reaches them, but a stop order sells at the market price at or below the price that is set. So because so many sell orders will be in, traders with stop orders at $2.60 may not have their shares sold until the stock is at $2.55, which will trigger stop orders at $2.55 to sell, and if the stock reaches $2.50 this will trigger even more stop orders. This can happen very quickly and the stock in this example may be down to $2.40 within 5 to 10 minutes!

This is why technical analysis is so important. If you utilized technical analysis in this example, you would have recognized the support at $2.60, saw the breakdown coming, put your short order in at $2.60 and sold at $2.40, resulting in 20% profits in one day, may even 10 minutes!

I hope you now have an understanding of what to look for in a chart, what breakouts and breakdowns look like, and why technical analysis works. You can trade just breakouts and breakdowns and profit nicely, but these are only basic charts. These charts take time to develop and you may not see them every day so be sure to check out more profitable charting patterns, where you will learn of more charts that are good for buying and shorting!

Advice:

While you are still learning it is also good to watch others’ stock picks. I will be posting stock picks here on DayTradingDummy.com that will include stocks charts, reasons for buying or shorting, as well as results. I recommend you subscribe via email for free daily stock picks and updates.

If you are also interested in viewing stock picks of other successful day traders I would recommend signing up for TimAlerts from Timothy Sykes or FousAlerts from Cameron Fous. Tim turned his $12,000 bar mitzvah money into $1.65 million in just over 2 years, buying breakouts and shorting penny stocks. Cameron Fous is a trader from California who primarily buys rebounds and breakouts. He is up over $297,000 since January of 2011. These are both very successful traders whose trading activity is tracked and verified. If you are interested in following their trades you can do so via these links: TimAlerts and FousAlerts.