Stock Trend Analysis - Introduction
I remember well enough what it was like trying to get started with Stock Trend Analysis. The learning curve was torturing on occasion. It seems no matter what I studied, I didn’t understand quite enough to put it into practice. Over time with some serious tenacity I became good at enough to start earning 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 understand how all these indicator definitions and macroeconomic information fit together to form a decent understanding of technical trading. I think I can save you some time and lots of frustration with this handy little 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 acquainted with how the stock market functions and how to purchase and trade stocks. I hope so because it is an obvious prerequisite. Keep in mind this is an conversational 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 , traders tend to prefer 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 compared to its peers (groups of companies in the same business) it presents clues about potential weaknesses and strengths of the company. Its also useful in appraising a company’s long term chances for growth.
Technical Analysis looks to capitalize on the collective knowledge of open market players (other traders) who are by-and-large Fundamental Analysts. Technical Analysis is basically a study of supply and demand. So, lets determine exactly how Technical Analysts use the market as their guide to trading markets.
A Casual Technical Analysis Example: Price Speaks Volumes To begin, know that Price and Volume are both technical indicators. Price being naturally the chief indicator over any other. Each time a stock price moves up it signals a vote of confidence by all players. Sellers stood firm for a higher price than the predominating rate and buyers intervened and purchased 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, players anticipate prices to continue to go up. Technical traders speculate that prices will increase as long as volume is stronger than average. If prices continue to mount while at the same time volume begins to flatten out, the participants are voting with fewer shares. This circumstance is a variety of technical breakdown.
Typical Volume Based Price Breakdown. One more phenomenon to consider is that once price direction changes, volume may begin 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 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 try to demonstrate shifts in the strength or force of price direction, or momentum. Leading indicators are useful to assist 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 usable 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 strong trend. They rapidly show traders the average direction of a stock price. They can send erroneous signals in markets that are trading at parity / proceeding sideways. Their optimal use is in trending markets because they can clearly show traders when to enter 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: Screening 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 quickly buy and sell stocks multiple times a day to attempt to lock up quick winnings. The Day Trader breaks down chart patterns and indicators which may span only a few hours or even a few minutes. Day trading is a risky line of work where great sums are acquired or lost in plain seconds. Day Traders pay precise attention to tick-by-tick price information 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 span from a few months to as little as a few days. A typical trade for an Active Trader trader can be really brief, maybe a day or may last for many months as long as the on-going 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 departure is that the swing trader looks to maximize gains by capitalizing of the normal downswings in an broad upwards trending stock. The Swing Trader cycles in and out of the trade repeatedly until the broad trend softens before making a last exit. Swing traders must watch the price activity more frequently than the active momentum trader since the swing trade requires frequent attention.
To see the original Technical Analysis article complete with example charts, visit www.StockChartGrabber.com
