Beginners Stock Trading: Basic Chart Indicators and How to Profit With Them

Sometimes a price chart, alone, is not enough to make good trading decisions in beginners stock trading. The addition of chart indicators can be very helpful in identifying good entry and exit points. An indicator is simply an extra piece of information that gives more information about a certain aspect of the stock and its trading. Some indicators appear as an overlay on the main price chart, while others appear in their own mini-chart, above or beneath the price chart. Below are a few basic indicators that traders use. In Part 2, we’ll explore a few more advanced indicators for beginners stock trading.

Volume:
This is simply a running tally of all of the shares that are traded, during each time period. It, generally, shows how much interest there is in a stock and how many traded shares it can take to move a particular stock. Volume is indispensible in trading.

Moving Average:
Probably the most commonly used in beginners stock trading, this indicator takes an average of the previous X days’ closing prices for the stock and plots a point. These points are connected along the way, forming a line that slowly follows the stock’s price action. (i.e. a 20-day Moving Average will plot a point, for each time period, at the average of the stock’s previous 20 closing prices). There are two types of average: simple and exponential. The simple moving average takes a simple average, whereas, an exponential moving average weighs more recent closing prices more heavily, in the calculation. The moving average can serve as a support or resistance level.

Moving Average Convergence/Divergence (MACD):
The MACD is a very reliable indicator in beginners stock trading. It uses the difference between two moving averages to give an indication of a stock’s trend momentum. The two moving averages create a histogram that oscillates around a centerline, at zero. Together, they can help predict trend reversals.

Bollinger Bands:
This indicator is a measurement that compares a stock’s price levels to volatility. It appears as two lines that appear to surround the stock’s price action, swaying in waves, toward and away from the price. The more sharply the price moves (volatility), the further apart the bands are. As the stock moves less sharply, the bands will settle in closer to the price. As the bands tend to contain most, if not all, of the stock’s price swings, it is used to spot potential trend reversals, as the price touches or pierces one of the bands (i.e. if the price touches or pierces the upper band, it can be expected that the price will fall back down inside the bands).

In beginners stock trading, these basic indicators alone can greatly improve your trading, if used correctly. It is easy to add as many indicators as the chart allows, but this can lead to mixed signals and confusion. The best method is to try out a few at a time, and see what works best. Keep things simple. Typically, a maximum of 3 or 4 indicators will yield the best results in beginners stock trading. The more indicators that agree with the current chart’s condition, the higher the chances of a successful trade.