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How to Analyze Stocks Using Technical Analysis

by | Feb 21, 2022

One of the biggest mistakes beginner traders make is not looking at the big picture, or only focusing on certain pieces of the puzzle. 

Learning how to analyze stocks involves looking at several different pieces of a puzzle and being able to put them all the right way.

So I want to show you a simple process I use that’ll help you learn how to analyze stocks in a systematic way. 

These are some of the same techniques I teach my students and practice myself daily. 

Learning How to Analyze Stocks Begins With the Stock Index

If you’ve ever read “How To Make Money In Stocks” by William O’Neil, then you probably know they correlate to their index about 70% of the time.

This means stocks that have reasonably good volume tend to follow and mimic indexes.

I mean, all you have to do is look at a few popular stocks and you’ll see they follow the index they’re in for the most part.

This isn’t always the case, but it happens enough of the time where you’ll want to consider what the major indexes are doing.

If you are trading tech stocks, for example, you’d want to monitor the Nasdaq

And if you trade blue-chip stocks, you’d want to keep your eye on the Dow Jones and S&P 500.

But one indicator I like to pay close attention to is the 52-week high/low figures.

You can get a great idea of the current market climate by looking at how many stocks are making one-year highs or lows.

If you notice a large percentage of stocks breaking above their yearly highs, the odds are the index is trending strong. And if you notice that most stocks aren’t breaking out of the 52-week high/low, you can be assured the market is in a range-bound cycle.

Check for Scheduled Fundamental News

This step is often avoided by traders, especially beginners… 

It’s important to do this step when learning how to analyze stocks because not monitoring fundamental news is one of the biggest pitfalls beginners make.

That doesn’t mean you need to read The Wall Street Journal cover to cover. But I suggest you take a quick look to see if there’s any fundamental news that could affect the price of your stock. 

You want to avoid trading particular stocks prior to earnings and other news that may cause random volatility.

This is one of the biggest reasons traders get stopped out of their positions prematurely.

Determine the Current Stock Market Cycle

It’s also important to know which cycle the stock you’re trading is in…

You need to know if it’s in a trending or a range-bound cycle. Many traders avoid looking at the market this way and don’t match the right cycle to their strategy.

Market cycles typically alternate, so always look at the previous cycle for clues when determining a stock’s current cycle.

Studying basic market cycles is a great way to begin learning how to analyze stocks and other assets. 

Apply Technical Analysis Tools

Once you determine the current market cycle, you can begin applying basic technical analysis to help you better understand its environment.

For example, if a stock’s in a trending cycle, you want to apply basic trending tools… such as moving-average indicators and trendlines to determine if the stock’s breaking out, retracing or beginning to reverse.

You might also want to see if the stock fits into any classic chart patterns to help you decide what phase of the cycle it’s in.

Apply Entry and Exit Rules That Match the Stock

The final step when learning how to analyze stocks is to apply the correct entry and exit strategy.

If your analysis shows the stock in a strong momentum phase and the broader market confirms this as well, a breakout strategy with a wide stop-loss order would probably be the best to use. 

It allows you to take advantage of the volatility that comes along with momentum.

But if you notice that the stock is in a range-bound trading pattern, you’ll want to apply an oscillator to help measure divergence and overbought and oversold levels.

If you notice that a reversal pattern is underway, you’ll want to look for gaps and reversal-entry patterns such as the Gap Tail method. 

A Few Things to Keep in Mind

If you follow these steps, you should have a better idea how to analyze stocks and figure out the market’s current cycle. 

Always begin with the big picture and work down from there.

Looking at stocks through a microscope isn’t something you want to do before you enter, or while you’re in a position.

You have to look at the big picture and follow the steps listed in this article. 

I hope this article gives you a good idea of how to correctly approach basic stock analysis from the start.

All the best,

Roger Scott
Roger Scott Trading

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WRITTEN BY<br>Roger Scott

Roger Scott

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