Technical Trader (Technical Analysis)
In momentum trading, a trader observes stock signs that he will make significant uni-directional price movements at high volume for a sufficient period of time, and generate profits. By looking at the momentum line, momentum traders have carried out technical analysis by checking stock charts for signs of break out. But the technical indicators used in momentum trading are just the tip of the iceberg, they are only a small sample of very broad charts and chart patterns available for technical traders. Here are some aspects that need to be considered in technical trading.
Reviewing Different Types of Traders
Before we discussed the focus on technical trading, let’s review some of the main styles of equity trading:
- Scalping: Scalper is an individual who produces tens or hundreds of trades per day, trying to get a small profit from every trade by utilizing a bid-demand spread.
- Trading Momentum: Momentum traders look for stocks that move significantly in one direction at high volumes and try to jump on it to carry momentum to the desired profit.
- Technical Trading: Technical traders are obsessed with charts and charts, looking at charts or indexes for signs of convergence or divergence that might indicate a buy and sell signal.
- Fundamental Trading: Fundamentalists trade based on fundamental analysis, which examines things like events in the form of actual financial statements, stock split, reorganization or acquisition.
- Swing Trading: Swing traders are truly fundamental traders who hold their positions longer than a day. Most fundamentalists are actually swing traders who experience fundamental changes in the company and generally require several days or even weeks to produce sufficient price movements so that traders can claim reasonable profits.
Beginner traders may experiment with each of these techniques, but in the end they have to choose one, equating their knowledge and investment experience with a style that they feel can devote further research, education and practice.
Exploring Technical Trading
Trading techniques is a broader style, and not even limited to trading. This can show a much broader philosophy or approach to investment. In general, a technical person is someone who looks back into history using past trading data patterns that can be identified to try to predict what might happen to future stocks. This is a common method practiced by economists and meteorologists: looking for the past to know the future. However, we all know how bad their forecasts are. We can only hope that as a technical person we will do better.
The challenge of technical analysis is that there are hundreds of technical indicators available, enough to make even the most advanced mathematicians feel confused. And there is no single indicator that can be considered the most universal, because each particular indicator may only apply to certain circumstances. Some technical indicators may be useful for certain industries, others only for stocks with certain classifications. Because of the unique patterns that can be traded throughout history, some relevant indicators can only be used on certain individual stocks.
Technical indicators, same as momentum indicators. He cannot provide a solution about when is the right time to buy and sell. They are bad predictors of the right timing, but they have the advantage of showing which stocks are candidates for further analysis with detailed data. Thus, technical analysis can be seen as a starting point – historical patterns do not have to be translated into a precise picture of future performance.
A little flashback that technical indicators, like the momentum indicator, cannot be used as a solution for when to buy or sell. They are bad predictors of the right time, but they are good at showing which stocks are candidates for further analysis with detailed data. Instead of trying to provide a thorough review of all the indicators available to technical traders.
Some do special groupings and try to give a general introduction to each indicator. In addition, this discussion is limited to indicators that apply to individual stocks because there are many indicators that might be useful for predicting indexes or industry groups, but that’s not what we worry about here.
General Technical Trader Indicator Group
Now we will discuss a little about the group of technical indicators that are commonly used by technical traders out there. Maybe some of these indicator groups can help your analysis later …
- Relative Strength Index (RSI): The recent relative strength index has measured stock performance in relation to its historical strength by comparing the number and magnitude of closing up and down. If the RSI rises above 80, this may indicate a saturated buying condition, where this is a signal to sell. If below 20 this might indicate oversold stocks, and indicate a buy signal.
- Trading Range: A series of high, low and closing prices are plotted on the chart for a certain period of time, and the support and resistance lines are drawn at the bottom and top of the range. Escape occurs when prices sustain movement, even for one or two periods, above or below the range.
- Pattern Analysis: This is probably the easiest form of technical analysis. The same price chart discussed above is analyzed for specific patterns that have historically appeared in the same stock or for general patterns that have been seen in many stocks over time.
- Trend Analysis: Graphical analysis is very complex and mathematical, analysts trend to see short-term and long-term trends and try to identify crossover, where prices go past their long-term averages. Long-term averages are referred to as moving averages, where the price range is refined for a certain period by leveling up a series of data points and planning a line that smoothes the actual price line of the stock. Moving average convergence divergence (MACD) is used to identify crossover, divergence and convergence, and overbought and oversold conditions.
- Gap Analysis: Gaps occur when the stock opening price is significantly higher or lower than the previous day’s closing price, probably due to company news released overnight or some other factor. The trader gap is concerned with stock performance above or below its opening price, which may indicate further movement in both directions. In this sense, the trader’s decision may be closer to the momentum trader style than the technical analyst.
There are many, maybe tens and even hundreds of good books available about trading or technical traders. In addition to exploring introductory trading texts for chapters on technical analysis, there are several books that are highly recommended for use. Among them are “Financial Market Technical Analysis”, by John Murphy. This is a comprehensive guide to trading methods and applications, then “Technical Analysis of Stock Trends”, by Robert Edwards and John Magee, and “Encyclopedia of Chart Patterns”, by Thomas Bulkowski. These books are considered very relevant because they can be universally accepted.