Technical analysis can be quite useful in determining good entry and exit points, whether for short-term or long-term positions. Of course using Fundamental Analysis will be more important for long-term positions.
Candlesticks aside, here are 5 simple technical indicators that I frequently use. These indicators are best used in conjunction with one another to provide a more accurate picture.
I have attached the latest chart of Starhub to use as an example.
The first thing to do when looking at a chart is to determine the direction of the stock- whether it is in a downtrend, uptrend or in a sideways trading movement. Then I would take a look at some of these technical indicators.
1. Support and resistance lines
Support and resistance represent key junctures where the forces of supply and demand meet. Prior to the breakout, resistance was established at 2.30 and short-term support was at 2.15. Longer-term support, established last October is at 1.87. Since then there was a large move upwards which sent prices as high as 2.38, reaching a 15-month high. The breakout could have turned the 2.30 resistance level into support.
Strategy: Buy when price reaches support levels and sell/reduce positions when price approaches resistance levels.
Trend Lines are an important tool in technical analysis for trend identification. They can be drawn by connecting 2 or more price points together. We can see that Starhub is in an obvious uptrend. Prices are currently at the top of the trend channel. Decisive trendline breaks can signal that the a trend change is imminent.
3. RSI ( Relative Strength Index)
The RSI reading shows whether a stock is oversold or overbought. Readings can range from 0 to 100 and a reading of 30 or less shows oversold conditions while readings of 70 or more show overbought conditions. However stocks can remain overbought or oversold for long periods so it is best to use this indicator together with other indicators. Keep a look out for positive divergences, where the indicator makes a higher high even though the price does not, and negative divergences, where the indicator fails to make a higher high even when the price makes a new high. Starhub is mildly overbought at the moment with an RSI reading of 72.
Strategy: Be wary when stock is in overbought region. Accumulate when positive divergence seen and sell/reduce positions when negative divergence seen.
MACD- A simple indicator which uses moving averages, typically calculated from the 12 and 26 day EMA (Exponential moving averages).It is best to use it together with other indicators as there can be fake moves. For Starhub, there are no sell signals for the MACD yet. The blue line is still above the signal line.
Strategy: Sell when the MACD line moves below the signal line, center line or when negative divergence is observed. Buy when the MACD line moves above the signal line, center line or when positive divergence is observed.
5. Bollinger bands
Bollinger bands- another useful indicator which measures volatility and relative price levels over a period of time. They are useful in identifying periods when prices are at extreme, and possibly unsustainable, levels. Prices tend to reverse when they exceed the upper or lower band. Also, when the bollinger bands tighten up, it usually shows that a large move is imminent. For Starhub, the last closing price of 2.36 is just out of the upper bollinger band at 2.35, so a short pullback may be likely.
There are other useful technical indicators such as moving averages, ADX etc but I will stop here for now.