Photo by Markus Winkler on Unsplash

Once you have conducted your fundamental analysis on a company, it is time for you to conduct some technical analysis to help determine at what price you want to buy shares of the company.

The great thing about doing technical analysis for a long-term investment is that your entry does not have to be 100% precise.

Since you are planning to hold onto a security for 5,10, 15, etc. years, buying at what is considered a slightly high price in the short-term will not be the end of the world for you.

When it comes to technical analysis for long-term investing, there are 3 simple technical indicators that help simplify it. Technical indicators are visual calculations used to reflect historical price action on a chart.

It is important to note that technical indicators are only indicators. They are not mystical tools that predict the future. Without further ado, the 3 simple technical indicators to use for long-term investing are:

1. Bollinger Bands

2. 200-Day Simple Moving Average

3. Relative Strength Index

1. Bollinger Bands

Bollinger Bands are defined by a set of trendlines plotted two standard deviations above and below a simple moving average of a security.

The simple moving average typically used for Bollinger Bands is a 20-day simple moving average.

When it comes to understanding how to use Bollinger Bands, when a security’s price reaches the bottom trendline, it is considered oversold.

On the other side, when a security’s price reaches the top trendline, it is considered overbought.

In the eyes of a long-term investor, the 20-day simple moving average can be used as a tool to decide when to consider buying (when a security’s price crosses below it) and when to consider selling (when a security’s price crosses above it).

I think of the relationship of a security’s price and its 20-day simple moving average as a visual representation of buy low, sell high. With that being said, the more oversold a strong company is, the more you should consider buying.

The more overbought a strong company is, the more you should consider selling or just patiently wait for the next major selloff to occur.

The main limitation of Bollinger Bands is that it is an indicator that only focuses on price volatility.

John Bollinger, the creator of Bollinger Bands, recommends using Bollinger Bands with 2 or 3 other indicators that provide further signals of the direction of a security’s price.

An example of Bollinger Bands used on Facebook. Courtesy of Yahoo Finance.

2. 200-Day Simple Moving Average

The 200-day Moving Average is one of the simplest but most important indicators for long-term investing. The 200-day moving average is considered the ultimate support line for a security.

Support is a price level where a downtrend can be expected to pause. If a security’s price goes below its 200-day moving average, there is either a major risk with that company’s financial health, a major risk with the stock market and/or economy as a whole, or the company is simply just undervalued and oversold in the short-term.

A biotechnology company’s price may drop below its 200-day moving average if it has failed a recent clinical trial that would have put it on course to be a profitable company after 10 years of losses.

Many technology companies such as Facebook, Apple, and Microsoft experienced their prices dipping below their 200-day moving average last March due to major selloffs caused by panic at the beginning of the coronavirus pandemic.

An example of a 200-day simple moving average used on Facebook. Courtesy of Yahoo Finance.

3. Relative Strength Index

The relative strength index, RSI, is a momentum indicator that measures the magnitude of recent price changes to evaluate the oversold or overbought conditions of a security. RSI is displayed as an oscillator, a line that moves between two extremes, and has a reading from 0 to 100.

Typically, a reading of 30 or below is considered oversold, while a reading of 70 or above is considered overbought. RSI is generally calculated over a 14-day period.

RSI used together with Bollinger Bands can help you better plan on the best entrances and exits for your long-term trades.

Typically, buying shares of a strong company that is oversold in both its Bollinger Bands and RSI reading would be a great trade to consider making as a long-term investment.

Just like Bollinger Bands, RSI is limited when used alone, which is why I provided this simple example of using it with Bollinger Bands.

An example of RSI used on Facebook. Courtesy of Yahoo Finance.

An example of Bollinger Bands, 200-Day Simple Moving Average, and RSI used on Facebook. Courtesy of Yahoo Finance.

As stated earlier, technical indicators are only indicators. They are not mystical tools that predict the future.

With that being said, using technical indicators can further assist you with when to purchase or sell a security. Fundamental and technical analysis are both equally important when it comes to long-term investing.

It is not one versus the other. It is a combination of both. I like to make investing simpler for myself, so I hope you found this helpful because Bollinger Bands, 200-Day Simple Moving Average, and RSI are the exact technical indicators I use for long-term investing.