Using Simple Technical Analysis To Make More Money Investing
Technical Analysis is an dynamic trading technique used by many traders and investors alike. There are four major building blocks of Technical Analysis.
Technical Analysis provides a compelling tool to help find potential trade opportunities. However, a sound understanding of some core concepts is needed.
Technical Analysis Explained
There are four solid pillars of Technical Analysis. They are listed below in their order of significance along with the recommended amount of weight that should be placed on each pillar.
Trend ----------------------------50%
Support and Resistance ---------- 35%
Volume --------------------------10%
Oscillators ( MACD & Stochastic) --5%
Trends
Trends are the most important indicator of Technical Analysis and can be viewed in terms of:
Long Term ------------ Months to Years
Intermediate ---------- Weeks to Months
Short Term ------------ Days to Weeks
Identifying Trends
In looking at technical analysis indicators, be aware that a trend can be up, down or sideways. Profits can be made with each. The best technical analysis practice not only calls for indenting the trend but to trade with it.
The Dow Theory Trend Analysis identifies the following Trends:
- Up Trend ------------ A series of higher highs and higher lows.
In an up trend, it is most important to identify support. Therefore, in drawing your trend lines, try to connect the low points of the up trend
- Down Trend ------- A series of lower highs and lower lows.
In a down trend, it is most important to identify resistance. In drawing your trend lines, try to connect the high points of an down trend.
- A sideways trend ------- You can even make money if the trend is sideways and channelling between a high and low point.
Caution: A broken trend line is not necessarily a trend reversal. Always buy or sell with the trend and not against it.
This rule should only be violated if the stock price is approaching a Support or Resistance level. Although it is prudent to wait until the reversal is obvious, preempting the reversal is often used by experience traders.
However, they have to be prepared to act quickly to unwind their position if the support or resistance that they try to preempt is violated.
The rationale that makes Support and Resistance super important in technical trading is not a mystery. Support and Resistance Levels are self fulfilling especially when they occur at nice round numbers.
This is because many traders do the same thing and act the same way. So you have the herd acting the same way and confirming these Support and Resistance Levels. So if you can identify these points, you can benefit immensely.
In most instances, stocks bounce off Support and Resistance Levels. Also, when you have multiple attempts or tests of these levels and they hold, the stronger the Support and Resistance Levels seem to get.
Hence the reason why preemption as prices approach these levels is a calculated and considered prudent risk for many aggressive traders.
Support and Resistance Levels, however, will be inevitably be broken.
When this happens, old Supports once broken become new Resistance and old Resistance once broken becomes new Supports.
About the Author
Winston Duke
LIFE EXPERIENCES
2004 - Present Active in Stock Market
2000 - 2004 Financial Analyst
FORMAL EDUCATION
1986 -1987 Rutgers University Graduate School
1980 -1984 Rutgers University
1984 BACHELOR OF ARTS: MAJOR: ECONOMICS
PROFESSIONAL LICENSES
1.) Certified General Contractor's License. FL: Status:Active
2.) Securities license Series 6: Status: Inactive
For more information on Technical Analysis including Volume and MACD go to
stock-trading-guru.com/technical-analysis.html
Winston has extensive knowledge and proficiency in the Financial Markets. He started trading in the Commodities Market since the mid 1990's and has since become very active in the Stock Market.