For example, here's a chart of Alibaba Group Holding (NYSE: BABA). You can see that starting in late March, the stock started to move higher. Let's say that in June, you were looking for a good entry point. If you drew a trend line, which is a straight line connecting the lows of the stock, you'd see that it'd be best to buy the stock when it came down to the trend line because in the past, it had bounced off that area of support. (Support is a price level where investors and traders come in and buy the stock, "supporting" it.) In late June, you could have bought the stock at $240 and eventually made money. But if you waited until the stock came back down to its trend line, you would have done even better... You'd have bought it at around $210 and ridden it higher for months, as the stock didn't break the trend line until November. More importantly, you'd have lowered your risk. Here's why... When a stock breaks a trend line or other support, that is a sign that the psychology around the stock has changed. For whatever reason, previously when the stock came down to the trend line, buyers jumped in. When it breaks the trend line, buyers are no longer coming to the rescue. We don't necessarily know if it's because the company's earnings are down, the CEO was arrested or a new competitor has emerged - and to be honest, we don't care. We just know that the psychology of investors has changed, and we need to think about getting out. Let's say in October, you were interested in Alibaba. You could have bought it at $310 and then watched it fall all the way to $250, taking a sizable loss. If you waited for the stock to come back down to the trend line, you'd have bought it at $270. Then the stock did in fact break the trend line, signaling that the uptrend that had been in effect since March was over. That was a sell signal, and you'd have gotten out with a small loss instead of a large one. This was just a very simple example. There are many, many ways to use technical analysis. Using charts and technical analysis increases the odds and size of your profits while decreasing the odds and size of a loss. If you're interested in learning more about technical analysis, the best book by far is Technical Analysis of the Financial Markets by John Murphy. It is considered the bible of technical analysis. Twenty-two years ago, I was told, "Go learn some technical analysis." I'm still studying it every day. I can't imagine making a trade without it. Good investing, Marc P.S. Starting tomorrow, be on the lookout for a special technical analysis training and offer from me. I'll show you exactly how to use stock charts to transform your trading by growing your profits and minimizing your risk. Stay tuned... |
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