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How to Read Stock Charts: A Technical Analysis Guide
How to Read Stock Charts: A Technical Analysis Guide — a free intermediate-level guide covering how to read stock charts technical analysis. Learn with...
What you will learn
- 1. Foundations of Technical Analysis and Chart Types
- 2. Timeframes and Candlestick Anatomy
- 3. Price Patterns: Continuation and Reversal
- 4. Trend Analysis: Moving Averages and Trendlines
- 5. Momentum Indicators: RSI, Stochastics, and MACD
- 6. Volume Analysis and On‑Balance Volume (OBV)
- 7. Support, Resistance, Pivot Points, and Fibonacci
- 8. Advanced Overlays: Bollinger Bands and Ichimoku Cloud
- 9. Building a Multi‑Indicator Trading Setup
- 10. Practical Application: Real‑World Chart Analysis Workflow
1. 1. Foundations of Technical Analysis and Chart Types
The Moment a Chart Tells a Story Imagine you are watching a live broadcast of a major earnings release. The headline numbers have just been announced, and the market is already moving. In the split‑second between the news feed and the first trade, you glance at a price chart on your laptop. The line is sloping upward, the latest candlestick is a long green body with a small upper wick, and the volume bar is noticeably higher than the previous day. Instinctively, you recognize a bullish signal and decide to add to your position. That flash of insight is not magic—it is the result of technical analysis, a discipline that teaches you to read the language of price. In this chapter we will unpack the foundations of that language: what technical analysis is, how it differs from fundamental analysis, why price history is the chartist’s sole data source, and how the three primary chart formats—line, bar, and candlestick—convey that information. --- 1. Defining Technical Analysis Technical analysis is the study of historical market prices, volumes, and open‑interest to forecast future price movements. Its core premise is simple yet powerful: All known information is already reflected in the price; therefore, price itself becomes a proxy for market sentiment, supply‑demand dynamics, and collective expectations. 1.1 Core Tenets | Tenet | What It Means for the Trader | |-------|------------------------------| | Market action discounts everything | Prices already incorporate news, earnings, macro data, and trader psychology. | | Prices move in trends | Once a direction is established, it tends to persist until a clear reversal. | | History tends to repeat itself | Human behavior is cyclical; patterns observed in the past often reappear. | These tenets give technical analysts a framework that is self‑contained: they do not need to dig into balance sheets, management commentary, or industry forecasts. Instead, they focus on the price‑time series that is publicly available for every listed security. 1.2 Technical vs. Fundamental Analysis | Aspect | Technical Analysis | Fundamental Analysis | |--------|--------------------|----------------------| | Primary Data | Historical price, volume, open interest | Financial statements, earnings, macroeconomic indicators | | Time Horizon | Short‑ to medium‑term (intraday to months) | Long‑term (quarters to years) | | Goal | Identify entry/exit points based on market psychology | Determine intrinsic value and margin of safety | | Typical Tools | Charts, trendlines, oscillators, moving averages | Ratios (P/E, P/B), discounted cash flow models, industry comparisons | | Assumption | Markets are efficient at pricing known information | Markets can misprice assets; value will converge over time | Both approaches can coexist—many professional traders blend the two—but the technical lens is uniquely suited for timing decisions, while the fundamental lens …
2. 2. Timeframes and Candlestick Anatomy
Choosing the Right Lens: Timeframes in Practice Imagine you are watching a tech stock that has just broken out of a three‑month consolidation. On your 5‑minute chart the price is jittery, forming dozens of tiny candles that look like noise. Switch to the daily chart and a clean, bullish candle sits on the breakout level. Flip to the weekly chart and the same move appears as a modest blip inside a long‑term uptrend. Which picture tells you what to do? The answer lies in the timeframe you select. Each timeframe compresses the same stream of price‑time data into a different “grain” of information. Selecting the appropriate grain is the first step in turning raw market action into a usable signal. 1.1 Intraday (minutes to hours) Typical uses – scalp and day‑trade entries, short‑term liquidity assessment, high‑frequency pattern spotting. Strengths – reveals the market’s immediate reaction to news, order‑flow imbalances, and intra‑session support/resistance zones. Pitfalls – amplified noise, frequent whipsaws, and a tendency to over‑emphasize random price wiggles. When to rely on intraday: you have a short holding horizon (seconds to a few hours) and need precise entry/exit points. Intraday candles are especially helpful for spotting micro‑reversals (e.g., a hammer on a 1‑minute chart) that can be executed within the same session. 1.2 Daily Typical uses – swing‑trade setups (2‑10 days), confirmation of intraday patterns, identification of medium‑term trend direction. Strengths – balances noise reduction with enough resolution to see clear price action; daily candles often capture the full story of a single trading day, including opening gaps and closing momentum. Pitfalls – can obscure intra‑day volatility that matters for tighter stop‑loss placement. When to rely on daily: you intend to hold a position across multiple sessions and need a view that smooths out the erratic intraday fluctuations while preserving the core price movement. 1.3 Weekly Typical uses – position‑trading (weeks to months), macro‑trend analysis, sector rotation decisions. Strengths – filters out short‑term noise, highlights the underlying direction of price‑time series, and aligns well with fundamental cycles (earnings, fiscal quarters). Pitfalls – slower reaction to sudden market shocks; a sharp intraday move may be invisible until the week closes. When to rely on weekly: you are interested in the broader market narrative—whether a sector is entering a new phase, or a stock is consolidating before a longer‑term breakout. 1.4 Monthly Typical uses – long‑term investment decisions, portfolio allocation, retirement‑grade horizon analysis. Strengths – provides the clearest view of the “big picture” trend, smoothing over years of data to reveal structural shifts. Pitfalls – extremely lagging; a decisive reversal can take months to materialize on the chart. When to rely on monthly: you are positioning for years ahead, perhaps aligning with demographic …
3. 3. Price Patterns: Continuation and Reversal
Recognizing the Narrative: A Real‑World Snapshot Imagine you are watching the 15‑minute chart of a widely‑traded tech stock that has been climbing steadily for the past three weeks. The price suddenly pulls back into a tight, rectangular shape, trades sideways for a dozen bars, then erupts upward, breaking the prior high with a surge in volume. Within minutes the price resumes its upward trajectory, barely pausing before continuing its climb. What you have just witnessed is a price pattern—a visual clue that the market is either pausing (continuation) or turning (reversal). The ability to read these clues lets you align your entry, stop‑loss, and target with the market’s underlying intent, turning “noise” into actionable information. Below we dissect the most reliable continuation and reversal patterns, explain how to measure them, and show how volume and broader context sharpen their predictive power. --- Continuation Patterns Continuation patterns appear when the prevailing trend needs a brief breather before resuming its course. They are the market’s way of “catching its breath.” The two classic formations are flags and pennants. Flags | Feature | Description | |---------|-------------| | Shape | Small, parallel‑channel rectangle that slopes against the prevailing trend (up‑flag in a bullish trend, down‑flag in a bearish trend). | | Duration | Typically 1–3 weeks on daily charts; a few hours to a couple of days on intraday charts. | | Trendlines | Two converging trendlines that run parallel to each other and counter‑trend to the longer‑term move. | | Volume | Light to moderate during the flag formation; a noticeable spike on the breakout. | How to Identify a Flag 1. Locate a strong, impulsive move (the “pole”). 2. Observe a consolidation phase where price oscillates within parallel lines. 3. Confirm that the consolidation is relatively shallow (usually 10‑20 % of the pole’s length). Measuring the Target - Step 1: Measure the length of the pole (from the start of the impulsive move to the start of the flag). - Step 2: Project that distance upward (for an up‑flag) from the breakout point. - Result: The projected price is your price target. Example: A pole of 8 % rise followed by a breakout at $120 predicts a target around $128.8 ($120 × 1.08). Volume Confirmation - A volume trough during the flag followed by a sharp volume surge on the breakout reinforces the pattern’s reliability. - If volume remains flat or declines on breakout, treat the signal with caution. Pennants | Feature | Description | |---------|-------------| | Shape | Small, symmetrical triangle (converging trendlines) that points against the prevailing trend. | | Duration | Generally shorter than flags—often a few days on daily charts or a few hours on intraday charts. | …
4. 4. Trend Analysis: Moving Averages and Trendlines
A Real‑World Question Imagine you’re scanning the S&P 500 chart on a 4‑hour timeframe. The price has been hovering around a flat range for weeks, but suddenly the 20‑day simple moving average (SMA) tilts upward and the price pierces a long‑drawn downward trendline. Is this the start of a new up‑trend, or just a fleeting blip? The tools you’ll master in this chapter—moving‑average crossovers and validated trendlines—are the lenses that turn that ambiguous moment into a clear, actionable signal. --- Understanding Moving Averages Moving averages smooth raw price data, allowing the underlying trend to emerge from the noise of daily fluctuations. Three families dominate the intermediate‑level toolbox: simple, exponential, and weighted moving averages. Each trades off responsiveness against smoothness. Simple Moving Average (SMA) The SMA is the arithmetic mean of the last N closing prices. \[ \text{SMA}N = \frac{1}{N}\sum{i=0}^{N-1} C{t-i} \] Where \(C{t-i}\) is the closing price i periods ago. Interpretation - Flat SMA → price is ranging or moving sideways. - Rising SMA → average price over the look‑back period is increasing → bullish bias. - Falling SMA → bearish bias. Because every price in the window receives equal weight, the SMA lags the most recent price action. The lag is roughly \(N/2\) periods, which is why a 200‑day SMA on a daily chart is a classic long‑term trend indicator. Exponential Moving Average (EMA) The EMA gives more weight to recent prices, reducing lag while preserving smoothness. It’s calculated recursively: \[ \text{EMA}t = \alpha \cdot Ct + (1-\alpha) \cdot \text{EMA}{t-1} \] \[ \alpha = \frac{2}{N+1} \] Key points - Higher α (shorter N) → more responsive, but noisier. - Lower α (longer N) → smoother, but slower to react. Because the EMA incorporates the previous EMA value, it reacts to price changes faster than the SMA, making it a favorite for crossover signals. Weighted Moving Average (WMA) The WMA assigns a linear weight that increases with recency: \[ \text{WMA}N = \frac{\sum{i=1}^{N} i \cdot C{t-i+1}}{\sum{i=1}^{N} i} \] The denominator \(\sum{i=1}^{N} i = \frac{N(N+1)}{2}\) normalizes the weights. Why use a WMA? It sits between the SMA and EMA in terms of lag and smoothness, and its explicit weighting makes it easy to tailor for specific strategies (e.g., emphasizing the last 3 days of a 10‑day window). Choosing the Right Period & Timeframe | Timeframe | Typical SMA | Typical EMA | Typical WMA | |-----------|------------|------------|------------| | Intraday (5‑min) | 9, 21 | 9, 13 | 9 | | Daily | 20, 50, 200 | 12, 26 | 20 | | Weekly | 20, 50 | 10, 20 | 20 | Guideline: Align the moving‑average length with the trading horizon you’re targeting. A 20‑day EMA on a daily chart is often used …
5. 5. Momentum Indicators: RSI, Stochastics, and MACD
Relative Strength Index (RSI) Why RSI Matters When price has been climbing or falling sharply, the market often “over‑reacts.” The Relative Strength Index captures that over‑reaction by measuring the speed and magnitude of price changes over a chosen look‑back period (most commonly 14 bars). An RSI above 70 generally signals overbought conditions—buyers may be exhausted—while an RSI below 30 flags oversold territory—sellers may be capitulating. Because the RSI is plotted on a 0‑100 scale, it can be overlaid on any timeframe you studied in Timeframes and Candlestick Anatomy. The same 70/30 thresholds apply whether you are looking at a 5‑minute chart or a weekly chart, but the interpretive strength changes: a 5‑minute overbought reading often precedes a very short‑term pullback, whereas a weekly overbought reading can precede a more prolonged correction. Reading the Numbers | RSI Zone | Typical Interpretation | Typical Action | |----------|-----------------------|----------------| | 70‑100 | Overbought; momentum may be fading | Look for bearish reversals, tighten stops | | 30‑0 | Oversold; momentum may be bottoming | Look for bullish reversals, consider adding to longs | | 50 | Neutral; price is balanced | Use as a reference for trend direction (above 50 = upward bias, below 50 = downward bias) | Divergence – The Early Warning Light A divergence occurs when price makes a new high (or low) but the RSI does not follow suit. This mismatch often precedes a change in trend because the underlying momentum is weakening. - Bullish divergence: Price makes a lower low, RSI makes a higher low. - Bearish divergence: Price makes a higher high, RSI makes a lower high. How to spot it 1. Scan the recent swing points on the price chart (refer back to the swing‑high/low concept from Price Patterns). 2. Mark the corresponding RSI values at those swing points. 3. Compare the direction of the two series. 4. Confirm with a secondary signal (e.g., a candlestick reversal pattern) before acting. Practical Example Scenario: ABC Corp has rallied from $45 to $62 over three weeks on a daily chart. The RSI has risen to 78, flashing an overbought condition. Two days later, price pulls back to $58, but the RSI drops only to 68. The next day, price makes a new high of $63, yet RSI falls to 66. - Interpretation: The price is still climbing, but the RSI is diverging downward—a classic bearish divergence. - Potential Trade: Enter a short position (or tighten a long stop) if a bearish candlestick (e.g., a shooting star) forms at the $63 high, with the RSI confirming weakening momentum. Tips for Using RSI Effectively - Pair with trend analysis: In a strong uptrend (identified via moving averages from Chapter 4), an …
6. 6. Volume Analysis and On‑Balance Volume (OBV)
The Power of the Crowd: When Volume Speaks Louder Than Price Imagine you are watching the daily chart of XYZ Corp. The stock has been coiling in a tight range for weeks, forming a classic descending triangle (see Chapter 3). On the day the price finally pierces the lower trendline, the candle closes deep in the red—but the volume bar is barely larger than the previous day’s average. A few days later, the price rallies back above the triangle’s apex, this time on a massive volume spike that dwarfs the prior three weeks of activity. The breakout holds, and the stock continues higher. Which of the two moves would you trust more? Most traders who understand volume know that the second breakout, backed by heavy trading interest, carries far more conviction than the first, quieter move. This chapter shows how to read that “crowd‑noise” and turn it into a practical edge using On‑Balance Volume (OBV). --- 1. Why Volume Matters in a Price‑Centric World 1.1 Volume as the “Thermometer” of Market Activity - Price tells us where the market has moved; volume tells us how many participants were involved. - A price swing on thin volume may be a false signal—an isolated hand or algorithmic noise. A move on robust volume suggests broad consensus. 1.2 The Relationship Between Price Action and Volume Spikes | Scenario | Typical Price Behavior | Volume Signature | Interpretation | |----------|------------------------|------------------|----------------| | Breakout (upward) | Sharp rise, often with a long bullish candle | Sharp increase above the recent average | Strong buying pressure; breakout likely to hold | | Breakdown (downward) | Rapid fall, long bearish candle | Sharp increase (often even larger than bullish spikes) | Aggressive selling; potential for further downside | | Pull‑back in a Trend | Small retracement within a larger move | Moderate or declining volume | Healthy consolidation; trend still intact | | Fakeout | Reversal candle that quickly reverts | Low volume relative to surrounding bars | Lack of conviction; likely a false signal | Key Insight: Volume spikes that align with price direction act as confirmation, while mismatched volume (e.g., a strong price move on weak volume) raises red flags. 1.3 Volume Patterns That Mirror Price Patterns - Volume Climax: A sudden surge at the end of a trend, often preceding a reversal. - Volume Drying Up: Declining volume during a prolonged move may signal exhaustion. - Volume Build‑Up: Gradual increase in volume leading into a breakout, akin to a “pressure cooker” that finally releases. These concepts dovetail with the price patterns explored in Chapter 3. For instance, a head‑and‑shoulders formation becomes far more reliable when the right shoulder’s decline occurs on a volume climax. --- …
7. 7. Support, Resistance, Pivot Points, and Fibonacci
The Moment the Market Bounces Imagine you are watching the 5‑minute chart of a heavily‑traded stock just before the market close. The price has been climbing all day, but as it reaches $78.00—a round‑number level that also aligns with yesterday’s high—the candles start to form small‑body dojis and a bearish engulfing pattern appears. Within the next ten minutes the price reverses sharply, sliding back to the $76.50 area before resuming its up‑trend. Why did the price stall at $78.00? Why did it find a new floor around $76.50? And how could you have turned that brief reversal into a profitable scalp? The answers lie in three intertwined tools that every intermediate trader should master: support and resistance zones, pivot points, and Fibonacci levels. This chapter walks you through identifying these price landmarks, calculating them on the fly, and weaving them together into a disciplined intraday trading plan. --- 1. Support and Resistance – The Market’s Invisible Barriers 1.1 What Makes a Level “Support” or “Resistance”? Support is a price region where buying pressure has historically outweighed selling pressure, causing a down‑move to stall or bounce. Resistance is the mirror image—selling pressure dominates, halting an up‑move. In practice, these levels are rarely exact lines; they are zones that can be “soft” (a range of a few ticks) or “hard” (a precise price that has been tested many times). Key sources of support/resistance: | Source | Typical Characteristics | How to Spot It | |--------|--------------------------|----------------| | Prior Swing High/Low | Sharp peaks or troughs on the chart | Look for clear turning points on higher‑timeframe candles | | Round Numbers | Psychological barriers (e.g., $50, $100) | Scan for price clusters around whole numbers | | Moving Averages | Dynamic, slope‑dependent levels | Overlay the 20‑, 50‑, or 200‑period SMA/EMA | | Trendlines | Diagonal barriers connecting multiple highs or lows | Draw a line through at least three points (see Chapter 4) | | Volume‑Weighted Nodes | High volume nodes on a volume profile | Use a volume profile overlay to locate price clusters | | Fibonacci Retracements | Levels derived from the golden ratio (covered later) | Combine with other zones for confluence | 1.2 Identifying Zones with Confidence 1. Multiple Touches – The more times price has respected a level, the stronger the zone. Aim for at least three distinct touches across at least two timeframes (e.g., daily and 15‑minute) before treating it as a key level. 2. Volume Confirmation – A spike in volume on a bounce or reversal adds credibility. Compare the volume on the bounce candle to the average of the previous 20 bars. 3. Candlestick Confirmation – Patterns introduced in Chapter 2 (e.g., hammer, shooting …
8. 8. Advanced Overlays: Bollinger Bands and Ichimoku Cloud
The Moment the Bands Burst Imagine you are watching the 15‑minute chart of ABC Corp on a quiet Tuesday afternoon. The price has been coiled inside a narrow corridor for the past two hours, and the Bollinger Band width has shrunk to a fraction of its recent average. Suddenly, the price rockets upward, piercing the upper band with a bullish engulfing candle. Your heart races—is this the start of a genuine breakout or just a false alarm? The answer lies in two powerful overlays that, when read together, turn that fleeting moment into a disciplined entry: Bollinger Bands (volatility‑focused) and the Ichimoku Cloud (trend‑and‑momentum‑focused). This chapter shows you how to decode their signals, combine them, and place entries and stops with surgical precision. --- Bollinger Bands: The Volatility Lens 1. Quick refresher on construction - Middle Band: 20‑period simple moving average (SMA) – the same moving average you met in Chapter 4. - Upper & Lower Bands: Middle band ± 2 standard deviations of price over the same 20 periods. Why 2 σ? Roughly 95 % of price action in a normal distribution falls within these limits, giving the bands a natural “envelope” for most market moves. 2. Band width as a volatility gauge | Situation | Band width | Typical market implication | |-----------|------------|----------------------------| | Narrow (squeeze) | ↓↓↓ | Low volatility; price is consolidating and “energy” is building. | | Wide (expansion) | ↑↑↑ | High volatility; price is already in motion—trend may be strong or a reversal may be underway. | Key insight: A squeeze followed by a rapid expansion often precedes a strong directional move. This is the classic “volatility breakout” pattern that many traders chase. 3. Price interaction patterns 1. Band Squeeze + Breakout – Price exits the lower or upper band on strong momentum (often confirmed by a candlestick pattern). 2. Band Walk (Trend riding) – In a strong up‑trend, price repeatedly hugs the upper band; in a down‑trend, it rides the lower band. The middle SMA becomes a trailing stop. 3. Band Reversal (Mean reversion) – After a sharp move, price may revert toward the middle band, offering a fade opportunity. Tip: Align the breakout direction with the prevailing trend you identified in Chapter 4 (moving‑average crossovers, trendlines). A Bollinger breakout against a strong trend is statistically less reliable. 4. Practical breakout signals | Signal | Conditions | Typical action | |--------|------------|----------------| | Squeeze‑to‑Explosion | Band width drops 30 % below its 20‑period average, then expands 30 % within 3–5 bars; price closes beyond the band. | Enter in the direction of the breakout. | | Band‑touch confirmation | Price touches upper (or lower) band and forms a bullish (or bearish) engulfing candle, …
9. 9. Building a Multi‑Indicator Trading Setup
Why a Multi‑Indicator Approach Matters Imagine you’re watching a 15‑minute chart of XYZ Corp. The price has just broken above a descending trendline, the 20‑period EMA is turning upward, and the RSI has crossed the 50‑line. Each signal alone looks promising, but together they form a confluence that feels far more robust than any single cue. Research on trader performance consistently shows that redundant signals—multiple indicators that react to the same underlying price movement—inflate confidence without improving accuracy. Conversely, a well‑balanced blend of trend, momentum, and volume tools can filter out false breakouts, confirm the strength of a move, and provide clear exit cues. This chapter shows you how to deliberately assemble such a blend, turn it into a repeatable checklist, and verify its edge through back‑testing. --- Selecting Complementary Indicators 1. Map the Information Needs | Goal | Indicator Type | Typical Output | |------|----------------|----------------| | Direction of the prevailing trend | Trend (e.g., Moving Averages, Trendlines) | Up‑/down‑sloping line, crossovers | | Momentum behind the move | Momentum (RSI, Stochastics, MACD) | Overbought/oversold zones, divergence | | Underlying participation | Volume (OBV, Volume Profile) | Accumulation/distribution patterns | | Potential price extremes | Volatility/Overlay (Bollinger Bands, Ichimoku Cloud) | Upper/lower bounds, cloud color | Start by asking: Which aspect of the market am I trying to confirm? If you already have a trend from moving averages, you don’t need another trend‑only tool. Instead, add a momentum or volume indicator that reacts to different market forces. 2. Avoid Redundancy - Moving Average + MACD – Both are lagging trend filters; using both can double‑count the same price lag. - RSI + Stochastics – Both oscillate between 0‑100 and often signal the same overbought/oversold zones. Instead, pair a lagging trend filter (e.g., 50‑EMA) with a leading momentum oscillator (e.g., RSI) and a volume confirmation (e.g., OBV). This three‑pillared structure captures where the price is, why it might move, and whether market participants support the move. 3. Indicator Pairing Checklist - Trend: Choose one lagging tool (EMA, SMA, or a trendline). - Momentum: Choose one leading oscillator (RSI, Stochastics, or MACD). - Volume: Choose one flow‑based metric (OBV, VWAP, or Volume Profile). - Optional Overlay: Add a volatility band (Bollinger) or cloud (Ichimoku) only if you need a clear price‑range reference for exits. By limiting each category to a single indicator, you keep the setup lean, transparent, and easy to automate. --- Crafting a Step‑by‑Step Trade Checklist A checklist translates your indicator logic into a repeatable process. Below is a generic template; you will later tailor the parameters to the market you trade (e.g., equities, futures, crypto). 1. Define the Trade Horizon - Primary timeframe (e.g., daily for swing trades, 15 …
10. 10. Practical Application: Real‑World Chart Analysis Workflow
From Morning Coffee to Market Close: A Day‑in‑the‑Life of a Chart Analyst Imagine it’s 7:30 a.m. in your kitchen. The coffee is hot, the news feed is muted, and a single screen glows with a multi‑panel chart of the S&P 500, a handful of sector ETFs, and a watchlist of ten individual stocks you’ve pre‑selected. In the next ten minutes you’ll decide which of those ten symbols deserve a deeper dive, which setups merit a trade, and how you’ll document every step so that tomorrow’s performance can be measured against today’s decisions. That routine—systematic, repeatable, and data‑driven—is the heart of Practical Application: Real‑World Chart Analysis Workflow. Below is a step‑by‑step guide that turns the theory from earlier chapters (candlestick anatomy, price patterns, multi‑indicator setups) into a living process you can adopt, refine, and audit. --- 1. Building a Daily Scan Blueprint A successful workflow starts with a structured scan that filters the universe of tradable instruments down to a manageable shortlist. The scan should be: Objective – rely on quantifiable criteria rather than gut feeling. Time‑frame aware – align the scan horizon (intraday, daily, weekly) with your trading style. Iterative – tweak parameters weekly based on hit‑rate and false‑positive data. 1.1. Choose Your Universe 1. Broad market index – e.g., SPX, NDX, DJIA for macro‑level bias. 2. Sector ETFs – to spot relative strength/weakness (e.g., XLF, XLK, XLE). 3. Individual watchlist – 8‑12 stocks that meet your fundamental or thematic criteria (e.g., earnings growth, industry tailwind). Tip: Keep the watchlist static for at least 4 weeks before rotating; this gives the analysis enough data points to evaluate performance. 1.2. Define Scan Filters | Filter | Typical Setting | Rationale | |--------|----------------|-----------| | Trend direction (MA‑20 vs. MA‑50) | Uptrend if MA‑20 MA‑50; downtrend if opposite | Reinforces the “price moves in trends” principle. | | Momentum (RSI) | RSI < 30 (oversold) or 70 (overbought) | Flags potential reversal zones. | | Volatility (Bollinger Band width) | Band width 1.5 × 20‑day average | Highlights stocks poised for breakout. | | Pattern trigger (price pattern) | Presence of a bullish flag or double bottom (see Chapter 3) | Directs attention to proven continuation/reversal setups. | | Volume surge (OBV delta) | OBV increase 10 % over past 5 bars | Confirms strength behind price moves (Chapter 6). | Apply these filters in a charting platform that supports custom screener scripts (e.g., TradingView, ThinkOrSwim). Export the resulting ticker list to a scan results sheet—the first page of your daily journal. 1.3. Time‑Box the Scan 30 minutes – run the scan, note the symbols that pass. 10 minutes – rank them by combined score (e.g., assign 1‑5 points per filter, sum, and …
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