How to do Stock Trend Analysis
I can recall well enough what it was like trying to get started with Stock Trend Analysis. The learning curve was tormenting on occasion. I recall regardless of what I picked up, I didn't realize quite enough to put it into practice. Over time with some serious tenaciousness I became sure-handed enough to start 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 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 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, 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 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 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 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 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: 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 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 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. - 23212
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 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 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, 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 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 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 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 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: 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 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 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. - 23212
posted by X - Men @ 9:33 AM
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