In Shares investments and trading, often you will be entering the markets not knowing if you entered too early or too late. That is not a comforting fact for most people and hence making a buy order can be frightening at times. This post will be addressing some of the main methods commonly used to minimise the fear factor when buying shares on the exchange.

Special credits to Jason for his guidance when I started on this exciting journey.

1. Relative Strength Index

• RSI will be able to shed some light when the share counter you are looking at is either “Over Bought” or “Over Sold”
• According to the graph above, the two dotted lines at the 30 and 70 value signify the “Over Sold” and “Over Bought” situation respectively.
  • Over Sold Situation means Shares could be heading for a rebound upwards (Buy Signal)
  • Over Bought mean Shares could be heading for a rebound downwards (Sell Signal)

2. MACD (Moving Average Convergence/Divergence)

• MACD shows how the 12 day moving average (MA) converges or diverges from the 26 days moving average (MA)
• If the blue line (12 Days MA) converges towards the red line (26 days MA) then it means that there is likely a trend reversal from Uptrend or Downtrend
  • Reversal from above to below the 26 Days MA will signify a sell action
  • Reversal from below to above the 26 Days MA will signify a buy action
• The rational behind the following the Convergence and Divergence of the 2 MA is because the less weighted moving average will always gravitate towards the more weighted MA.

3. Bollinger Bands

• Bollinger Bands are the purple lines above and below the candle stick chart and the Red Lines in between the purple lines is a 20 Day (MA)
• The Expansion or contraction of the boundaries demarcated by the purple lines above and below the chart shows the volatility of the particular share counter going up or down. The greater the volatility, the higher or lower the share price can trend towards.
  • meaning if the candle stick (Daily, Weekly, Monthly) crosses the bands, it might be a sign of resistance thus signifying a buy when it crosses the lower band and a sell when it crosses the upper band.

After Learning the 3 technical analysis instruments, it does not mean you have absolute certainty to buy or sell a Share counter, these instruments provides you with technical signals to explain how the market is reacting to the price movements whether upwards or downwards.

With these instruments along with other, you will be able to gain better understanding of the shares on your watchlist and therefore making more informed decisions when purchasing or selling a share. Thus, reducing the risk involved when investing in the financial markets.

If you haven already read about the basics of fundamental analysis, Fundamental Analysis (Click here for the next article).