# 5 Excellent Technical Analysis Tools

Another guest post from one of my trading challenge students…I don’t use these tools, but they do exist and many traders use them so it’s better to know what they are than not know!

For reference, these are the 5 best penny stock patterns I care about

Here’s the guest post from one of my students:

There are so many technical analysis tools out there and it is very easy to get overwhelmed. At least some of the tools are complex in their underlying math, but easy to use. When using technical analysis to control buying and selling bereft from fundamental analysis try to keep the time scale smaller. Holding on too long can open you up to something unexpected.

Simple Moving Average

The simple moving average (SMA) gives you the daily average of the last x number of days. Using the 20-day, 50-day, and 200-day time periods are common. That provides three different levels of time information. The SMAs are typically used to provide support and resistance areas, and the crosses are treated as signals to buy, sell, or cover as the case may be. There are variations on the moving averages, but the simple ones suffice for what most people need them for. They are also effective to confirm another signal. Most indicators can be used together to present stronger evidence. Just be aware that some indicators use similar information so they are likely to arrive at the same conclusions.

MACD

The MACD (Moving Average Convergence/Divergence) is an example of an indicator using similar data to the SMA, though with different calculations resulting from it. This indicator is pretty versatile and the lines can be used along with the bars. For the lines when the fast line crosses over the slow line it can be treated as an early signal. Waiting for the bars to confirm the trend might work as well, but a lot of gains could be left on the table. The bars flip when the lines cross, but looking at the line can give you an earlier confirmation. If the slope on the crossing line looks sharp, then that is a strong signal. The goal is always to get fast moving gains and move on if you are short-term trading. The cross of the bars from below the baseline to above can be fast moving because it might be a correction or the opening of a reversal.

Relative Strength Index

The Relative Strength Index (RSI) is tricky in its math. It compares gains to losses and then charts whichever is greater and the magnitude of that. So an RSI that is climbing up rapidly means that the stock’s gains are rapidly outpacing its losses on a daily bases for the time period chosen. The most common time period is 14-days. So 10 scattered days of 10% gains, with 4 scattered days of small 1% losses would mean a sharp rise in the RSI. RSI is measured on a scale of 0-100 and 30 and 70 are used as oversold and overbought lines respectively. Above 70 is overbought, and below 30 is oversold. A lot of people actually treat the lines are breakout indicators, which tends to work. Breaking into 70 can be a sign that the stock is starting an upward breakout. It can also indicate that a stock is overbought, which seems like divergent signals so it would be good to use another indicator in conjunction. The RSI seems better suited to judging the strength of a move. With a trend it can tell you if the trend is strong or weak. Weak trends can turn badly at any time. Strong trends generally throw off some signals before turning.