Technical Analysis: Principles, Indicators, & Examples
Dear Penny Stock Millionaire,
For the 20+ years that I’ve traded penny stocks, I’ve used technical analysis. So it’s kinda shocking to me that so many newbie traders don’t understand what it is.
Technical analysis is a pretty broad term for patterns in the stock market. It has nothing to do with a company’s finances.
Instead, technical analysis focuses on the repeatable and predictable patterns in the stock market. These are the patterns my top students and I trade every day.
Personally, I think some traders try to get too fancy with technical analysis techniques and indicators. For me, all that adds too much noise.
I like to keep things simple by playing patterns that I played for over 20 years of trading penny stocks. More on that in a bit.
Now, let’s dig into the different types of technical analysis, technical analysis techniques, and more.
What Is Technical Analysis?
It’s impossible to know with 100% certainty which way a stock will go. If there was, I’d be the richest man in the world.
But that doesn’t mean it’s impossible to make educated guesses as to where the stock might go next. How do you get to that educated guess? Through technical analysis.
Like I said, patterns happen over and over in the stock market. That’s why I preach studying the past to all my students.
History tends to repeat itself. So when similar stocks make similar patterns — especially through price action on the charts — it’s likely the same outcome will happen again.
Let’s look at an example…
American Lithium (OTCQB: LIACF) 2-day, 1-minute chart — courtesy of StocksToTrade.com
This is one of my favorite patterns called the panic dip buy.
This repeatable pattern is a form of technical analysis. By studying past occurrences of this move, I’m better prepared for what can happen next.
No, I’m not right every time, and I cut losses quickly when I’m wrong. No point in holding and hoping … There’s always another play around the corner.
But enough about what technical analysis is, let’s move on to…
What Are the Principles of Technical Analysis?
Defining the specific principles of technical analysis is kinda tough. Everyone uses it differently, so it can be subjective. That makes it hard to pinpoint specific principles.
Here’s what’s key to me and what I think is one of the most important principles…
History repeats. It’s not always exactly the same, but studying the past can help you understand how the market moves. This is how you know how certain stocks or sectors behave.
For me, technical analysis is about using the past to better gauge what a stock might do next.
I don’t care which indicators you use (more on those soon) or which pattern you trade…
Patterns repeat again and again. So if you’re struggling to find consistency as a trader, it’s your job to study the past to prepare for the next time that pattern pops up.
My top student Mark Croock watched all my videos three times — that’s dedication.
The 3 Important Components of Technical Analysis
Regardless of how you use technical analysis, there are three extremely important components:
No, you don’t have to use all of these, as some might not all fit your strategy…
But generally speaking, these are the three most important components of technical analysis.
Charts and patterns are almost one and the same. You can’t spot patterns without charts in front of you. The charts show the stock price movements and make it easier to see the pattern rather than just looking at numbers.
So it’s crucial that you have a great charting platform. It’ll make trading a lot easier.
That’s why I use StocksToTrade every day. You can use it for technical analysis, charting, and so much more. Newbie traders can use its paper trading feature to practice trading and spotting patterns. It’s a no-risk way to learn trading.
StocksToTrade also has a bunch of technical analysis tools as well. We’ll dig into that more in a bit.
Once you understand how to read stock charts, then you can start looking for patterns like the panic dip buy I mentioned earlier.
What Are the Different Types of Technical Indicators?
Again, I like to keep my trading clean and simple. So for me, key technical indicators are basic support and resistance.
There are other types of technical indicators that all traders should know. Even if you don’t use them, you might find them useful later. And it’s always smart to know what’s available to you and other traders.
There are hundreds of indicators — too many to list them all here.
And you definitely don’t need to use them all. Like I said before, too many indicators can lead to extra noise that complicates your trading. Now, here are some of the most common indicators for traders…
Volume Weighted Average Price (VWAP)
A lot of traders love to use VWAP. It’s often considered one of the most useful and common technical indicators in trading. It’s a line on a chart that shows a stock’s average price based on both the price and volume throughout the day.
This isn’t a magic line that will tell you where a stock’s price is headed next … but it can be useful.
Essentially, when the price of a stock is above VWAP, the stock is bullish. That doesn’t mean the pattern is bullish, but it means the more than 50% of longs above VWAP are green on the trade.
The same applies when a stock’s price is under VWAP. This indicates a bearish price to me. Again, the pattern might be bearish, but the stock price would then be under average price paid for the stock between all trades — both long and short.
Moving averages come in a few forms: exponential and simple. Both do the same thing — indicate a trend. The shorter the moving average, the faster the trendline will move.
So with a shorter-period moving average, the trend is “determined” at a faster rate. Long-term trends use bigger moving averages, while shorter-term trends use smaller moving averages. Here’s an example of a popular day trading moving average — the 9 EMA (exponential moving average)…
American Lithium (OTCQB: LIACF) 2-day, 1-minute chart — courtesy of StocksToTrade.com
How Are Technical Indicators Used?
Traders use technical indicators in all kinds of ways. Generally, they’re used to build conviction for a trade.
But never use technical indicators as the sole reason for taking a trade.
For example, remember when I said that when a stock’s price is above VWAP I view it as more bullish?
That might give me conviction if I see a pattern forming when the stock is above VWAP if I want to take a long trade.
Technical Analysis vs. Fundamental Analysis
Technical analysis isn’t the only type of analysis. The other, which I talked about earlier, is called fundamental analysis. Technical analysis is based on patterns and indicators.
Fundamental analysis, on the other hand, has more to do with a company’s financial standing and filings. This might include a company’s share structure, profitability, and so on.
Don’t get me wrong — fundamental analysis is important. But keep one thing in mind…
Most penny stock companies are sketchy and have crappy fundamentals. Unless you’re a long-term investor, I’d argue technical analysis is generally more important for penny stocks.
What Are the Strengths of Technical Analysis?
Here’s one of the biggest strengths of technical analysis: it allows for a visual representation of a stock’s price. That’s how it allows traders to spot patterns.
Patterns are the basis of all of my trades — along with all the indicators in the Sykes Sliding Scale. And I’ve been using the same patterns for years. I may have to adapt them to the current market, but it’s how I stay in the game.
And I’ll say it again … history repeats itself. Patterns repeat in the stock market, and that’s how my top students and I stay in the game year after year, while degenerate gamblers blow up their accounts.
Does Technical Analysis Really Work?
Are you ready for some exciting news?
Technical analysis really can work.
It’s what’s helped me make over $5.5 million over the course of my 20+ year trading career, and what’s helped my top student Tim Gritanni make over $12 million.
Patterns are my favorite form of technical analysis because they’re so repetitive. Once you learn to spot your go-to patterns, the more consistently you’ll trade.
When all is said and done, technical analysis is a key component you need to learn before you start trading penny stocks.
Remember, a lot of penny stock companies my students and I trade are sketchy. I’m not saying don’t look at the fundamentals, but be prepared for what you may find.
To me, patterns and the Sykes Sliding Scale are more important. Learning them can help you find consistency as a trader.
What’s your favorite pattern or technical indicator for trading?
Talk to you tomorrow,
Editor, Penny Stock Millionaires