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 challenge to gaining skill was there are so many well meaning people willing to extend advice and so many resources online for technical descriptions of assorted indicators, but nothing I picked up seemed to help me realize how all these indicator definitions and macroeconomic data fit together to build a whole understanding of technical trading. I I can save you some time and lots of frustration with this convenient little guide.
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 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 discover 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 purchased 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 traded over time. Technical traders look at price and volume together to estimate how optimistic or bearish buyers and sellers are and possibly are becoming. An increase in volume across a given time-frame indicates increasing involvement and hence conviction that prices will go on to travel in the ongoing direction. Whereas, when volume starts to decline it is an indicator that market participants are losing their strong belief that prices will remain 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 think about is that once price direction varies, volume may begin to increase, once again supporting the conviction of market players of the new price direction. When an indicator such as volume starts to jibe with the price direction, this is known as a kind of price confirmation.
Technical Analysis Indicators Aside from the simple indicators of price and volume, there are countless indicators and more are produced every day. An indicator can frequently be something as casual as a moving average or far more complex. As you've learned already, indicators are an pivotal part of understanding and anticipating market activity. All technical analysis indicators fit two clear families.
It is important to observe that market circumstances dictate which form you will use, but never ignore price. Indicators are forecasters, but price speaks volumes, only prices are reality.
Leading indicators are applied in sideways markets. Leading indicators react before price does. Most leading indicators seek to register shifts in the strength or force of price movement, or momentum. Leading indicators are useful to help traders anticipate price moves because they can express 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 biased markets and give traders accurate 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 movements. A moving average is a simplified kind of lagging indicator. Lagging indicators are frequently employed when the markets are in a very solid trend. They quickly show traders the average direction of a stock price. They can send misleading signals in markets that are trading at parity / propelling sideways. Their foremost use is in trending markets because they can distinctly 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 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 think 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 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 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 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. - 23309
My own challenge to gaining skill was there are so many well meaning people willing to extend advice and so many resources online for technical descriptions of assorted indicators, but nothing I picked up seemed to help me realize how all these indicator definitions and macroeconomic data fit together to build a whole understanding of technical trading. I I can save you some time and lots of frustration with this convenient little guide.
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 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 discover 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 purchased 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 traded over time. Technical traders look at price and volume together to estimate how optimistic or bearish buyers and sellers are and possibly are becoming. An increase in volume across a given time-frame indicates increasing involvement and hence conviction that prices will go on to travel in the ongoing direction. Whereas, when volume starts to decline it is an indicator that market participants are losing their strong belief that prices will remain 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 think about is that once price direction varies, volume may begin to increase, once again supporting the conviction of market players of the new price direction. When an indicator such as volume starts to jibe with the price direction, this is known as a kind of price confirmation.
Technical Analysis Indicators Aside from the simple indicators of price and volume, there are countless indicators and more are produced every day. An indicator can frequently be something as casual as a moving average or far more complex. As you've learned already, indicators are an pivotal part of understanding and anticipating market activity. All technical analysis indicators fit two clear families.
It is important to observe that market circumstances dictate which form you will use, but never ignore price. Indicators are forecasters, but price speaks volumes, only prices are reality.
Leading indicators are applied in sideways markets. Leading indicators react before price does. Most leading indicators seek to register shifts in the strength or force of price movement, or momentum. Leading indicators are useful to help traders anticipate price moves because they can express 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 biased markets and give traders accurate 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 movements. A moving average is a simplified kind of lagging indicator. Lagging indicators are frequently employed when the markets are in a very solid trend. They quickly show traders the average direction of a stock price. They can send misleading signals in markets that are trading at parity / propelling sideways. Their foremost use is in trending markets because they can distinctly 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 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 think 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 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 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 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. - 23309
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