How to do Stock Trend Analysis
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 understand quite enough to apply it. Over time with some real tenacity I became good at enough to begin 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 several indicators, but nothing I found seemed to help me realize how all these indicator definitions and macroeconomic information fit in concert to forge a decent understanding of technical trading. I imagine I can save you some time and tons of frustration with this convenient little introduction.
An overview of technical analysis.
I imagine if you are interested in technical analysis sufficiency to read this far, you are already familiar with how the stock market functions and how to purchase and trade stocks. I hope so because it is a requirement. Bear in mind this is an casual overview of the learning path many traders, myself included have taken to understand Technical Analysis.
Technical Analysis - Fundamental Topics. What is Technical Analysis? For the unaware, there are two ranking 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 discover precisely how Technical Analysts use the market as their guide on trading markets.
A Simple Technical Analysis Example: Price Speaks Volumes First, realize that Price and Volume are both technical indicators. Price being naturally the central indicator over any other. Each time a stock price moves up it bespeaks a vote of optimism by all players. Sellers stood firm for a higher price than the prevalent rate and buyers stepped in and bought at that price anyway. Sellers holding out for more money while buyers step in to pay the difference between the market and asking price shows market optimism.
Volume is the amount of shares exchanged over time. Technical traders watch price and volume in concert to approximate how bullish or pessimistic buyers and sellers are and perhaps are becoming. An increase in volume across a given time-frame indicates increasing involvement and therefore increasing conviction that prices will continue to move in the current direction. Whereas, when volume begins to wane it is an indicator that market players are losing their conviction that prices will continue 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 think about is that once price direction changes, volume may start to grow, again verifying the strong belief of market participants of the new price direction. When an indicator such as volume begins to concur with the price direction, this is acknowledged as a kind of price confirmation.
Technical Analysis Indicators Apart from the simple indicators of price and volume, there are infinite indicators and more are produced every day. An indicator can frequently be something as simple as a moving average or far more complex involving long formulas. As you’ve seen already, indicators are an operative part of understanding and anticipating market action. All technical analysis indicators fit two different classes.
It is important to mention that market circumstances prescribe which sort you will use, but never disregard 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 set about to demonstrate changes in the strength or force of price direction, or momentum. Leading indicators are useful to help traders anticipate price movements because they can establish the strength or weakness of prices at their current level. Leading indicators do not do well as buy/sell indicators in steadily trending markets (up or down) because they indicate changes in momentum. They do well in sideways markets and give traders accurate 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 good trend. They rapidly show traders the popular 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 popular 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 insignificant without understanding them in the context of time. Indicators, leading and lagging both use time and price as the very basis of any formula. It may help to consider time frames as magnification of detail. If you consider a one year weekly chart and zoom into a one year daily chart, you are straightaway aware that you can see price action in deeper detail. Likewise traveling from a one year daily chart to a three month daily chart affords 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 attempt to seal in quick profits. The Day Trader examines chart patterns and indicators which may span only a few hours or even a few minutes. Day trading is a speculative job where great amounts are realized or lost in mere seconds. Day Traders pay precise attention to tick-by-tick price information as it comes out 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 little as a few days. A typical trade for an Active Trader trader can be really short, 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 central deviation is that the swing trader looks to maximize profits by capitalizing of the natural downturns in an overall upward trending stock. The Swing Trader cycles in and out of the trade repeatedly until the general trend weakens before making a last exit. Swing traders must observe the price activity more often than the active momentum trader since the swing trade requires frequent attention.
To see the original Beginning Technical Analysis article complete with example charts, visit www.StockChartGrabber.com
Did you enjoy this post? Why not leave a comment below and continue the conversation, or subscribe to my feed and get articles like this delivered automatically to your feed reader.
Comments
No comments yet.
Leave a comment