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VII. Technical Analysis

Technical analysis includes charting which we talked about earlier, however; I chose to break it into it’s own section as it is something I will talk about a lot. Technical analysis essentially encompasses any mathematical formula/algorithm that predicts,explains, or tracks stocks. There are two analytics I look at that most: bollinger bands and moving averages. These also play into the theory of regression to the mean.

  • Bollinger Bands- measures the one move standard deviation a stock is outside of a moving average. It is a good way to look at stock volatility and how much momentum is currently in a move. If you add this to trade volume size, you can get an easy daily swing view on a stock

  • Moving averages - is just the average price of a stock over a certain timeline whether it is 90 days, 180 days and so on. Tracking this with bollinger bands provides a good smoothing of where exactly a stock is going in the future.

  • Regression to the Mean- the theory that eventually a stock will return to its mean pricing. This means that if a price is higher or lower than it’s mean, that in theory the price will eventually circle back, signaling you should buy if its lower, or sell if its higher than its mean.

I will go into more detail on these in the future and how I value each indicator. Part of of it is getting comfortable using each analytic, but a lot of trading is feel as well. Some stocks react differently to each scenario and there isn’t a 100% sign on anything. You also have to account for true fundamental changes that will wipe away these principles and there will be an actual market move where you know the stock price will have an actual price change that will last for the future.

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