Stock Trend Analysis – The Basics
I can recall pretty well what it was like trying to get started with Stock Trend Analysis. The learning curve was painful at times. It seems regardless of what I found out, I didn’t know quite enough to apply it. Over time with some real tenacity I became excellent at enough to start netting some real money in the stock market.
My own major hurdle to gaining skill was there are so many well meaning people willing to extend advice and so many resources online for technical descriptions of disparate indicators, but nothing I picked up seemed to help me know how all these indicator definitions and macroeconomic information fit together to form a decent understanding of technical trading. I reckon I can save you some time and lots of frustration with this handy small getting started guide.
An overview of technical analysis.
I figure if you are interested in technical analysis sufficiency to read this far, you are already enlightened with how the stock market functions and how to buy and sell stocks. I hope so because it is a requirement. Bear in mind this is an conversational overview of the learning path many traders, myself included have taken to know Technical Analysis.
Technical Analysis – Fundamental Topics. What is Technical Analysis? For the unaware, there are two leading sorts of Stock Analysis.
Technical and Fundamental Analysis Although the two are not contradictory, traders tend to favor one over the other. Fundamental Analysis looks at a company s assets, debt, earnings and cash flow. It gives the analyst a clear characterization of a company’s health. When an analysis of one company is equated to its equals (groups of companies in the same business) it presents hints about possible failings and strengths of the company. Its also usable in assessing a company’s overall prospects for growth.
Technical Analysis looks to take advantage of the mass knowledge of open market participants (other traders) who are by-and-large Fundamental Analysts. Technical Analysis is at its heart an analysis of supply and demand. So, lets learn precisely how Technical Analysts use the market as their guide on trading markets.
A Simplistic Technical Analysis Example: Price Speaks Volumes Initially, recognize that Price and Volume are both technical indicators. Price being of course the cardinal indicator over any other. Each time a stock price moves up it bespeaks a vote of confidence by all participants. Sellers stood firm for a higher price than the prevailing rate and buyers stepped in and bought at that price anyway. Sellers holding firm for more money while buyers step in to pay the difference between the market and asking price demonstrates market optimism.
Volume is the amount of shares exchanged over time. Technical traders look at price and volume in concert to estimate how optimistic or pessimistic buyers and sellers are and perhaps are becoming. Growth in volume across a given time-frame bespeaks profit-maximizing participation and hence progressive strong belief that prices will carry on to go in the current direction. Whereas, when volume starts to wane it is an indicator that market players are losing their conviction that prices will go along in their current direction.
When volume is increasing along with prices, participants anticipate prices to proceed to climb. Technical traders speculate that prices will increase so long as volume is better than normal. If prices continue to go up while at the same time volume starts to drop, the participants are voting with less shares. This condition is a form of technical breakdown.
Typical Volume Based Price Breakdown. One more phenomenon to consider is that once price direction changes, volume may start to grow, once again corroborating the conviction of market participants of the new price direction. When an indicator such as volume starts to correspond with the price direction, this is known as a variety of price confirmation.
Technical Analysis Indicators Apart from the simple indicators of price and volume, there are countless indicators and more are produced every day. An indicator can often be something as simple as a moving average or far more complex. As you’ve witnessed already, indicators are an potent piece of understanding and forecasting market action. All technical analysis indicators fit two different families.
It is vital to remark that market circumstances prescribe which form you will use, but never brush off price. Indicators are predictors, but price speaks volumes, only prices are reality.
Leading indicators are used in sideways markets. Leading indicators react before price does. Most leading indicators try to demonstrate shifts in the strength or force of price direction, or momentum. Leading indicators are useful to help traders anticipate price trends because they can depict the strength or weakness of prices at their current level. Leading indicators do not do well as buy/sell indicators in steady trending markets (up or down) because they indicate changes in momentum. They do well in sideways markets and give traders precise signals about when to buy or sell.
Some useful leading indicators include Momentum, Stochastic and the Relative Strength Indicator (RSI). The RSI (leading indicator flags the overbought condition).
Lagging Indicators / Trend Following Indicators Use in trending markets (moving up / moving down).
Lagging indicators follow price moves. A moving average is a simplified kind of lagging indicator. Lagging indicators are frequently employed when the markets are in a very excellent trend. They rapidly show traders the well loved direction of a stock price. They can send phony signals in markets that are trading at parity / proceeding sideways. Their better use is in trending markets because they can distinctly show traders when to get in and how long to remain.
The most well loved lagging Indicators include Moving Average, Exponential Moving Average and Moving Average Convergence Divergence (MACD) The moving average is a Trend Following Indicator.
Technical Analysis Understanding time frames. In Technical Analysis, indicators are meaningless without understanding them in the setting of time. Indicators, leading and lagging both use time and price as the very basis of any formula. It may help to reckon of time frames as magnification of detail. If you view a one year weekly chart and zoom into a one year daily chart, you are immediately aware that you can see price action in deeper detail. Also traveling from a one year daily chart to a three month daily chart gives even greater detail of the price activity.
More about time frames in technical analysis: Watching multiple time frames exposes greater detail.
What kind of trader are you? Do you buy into a trade and then watch impatiently at every tick in the stock price? Or are you more of a set it and forget it kind of trader who monitors the price every few days or weeks? Maybe your style is somewhere in between? Why is this critical and what does it have to do with time-frames? read on.
The Day Trader Day Traders speedily buy and sell stocks multiple times a day to try to lock up quick profits. The Day Trader examines chart patterns and indicators which may span only a few hours or even a couple of minutes. Day trading is a high-risk job where fantastic amounts are gained or lost in mere seconds. Day Traders pay very close attention to tick-by-tick price data as it appears on their screen in real time.
Under FINRA and NYSE rules, a trader once flagged and classified as a pattern day trader, must keep up a $25,000 account balance must obtain a margin account. For more info on day trading refer to the FINRA Notice to Members and the NYSE Information Memo.
The Active Trader – Momentum Trader Although there is no standard definition as with the Day Trader, the Active Trader looks for trends that cross from a few months to as small as a few days. A typical trade for an Active Trader trader can be really small, perhaps a day or may last for some months as long as the underway trend is intact.
Active Trader Strategy – The Swing Trader Although the strategy used by the swing trader is very similar to that of the Active Trader, the principal departure is that the swing trader looks to maximize gains by capitalizing of the regular downturns in an broad upwardly trending stock. The Swing Trader cycles in and out of the trade repeatedly until the overall trend breaks before making a last exit. Swing traders primary observe the price activity more often than the active momentum trader since the swing trade requires frequent attention.
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