Technical Analysis

By Vinayak on Monday, September 9, 2013 with 0 comments

There is an old saying on Wall Street: "never fight the tape". Whether most admit it or not, the markets are always looking forward and pricing in what is happening. This means that everything we know about earnings, the management and other factors is already priced into the stock. Staying ahead of everyone else requires that you use technical analysis to understand what is going on.

Technical analysis is a process of evaluating and studying the stock or markets using previous prices and patterns to predict what will happen in the future. In short-term trading, this is an important tool to help you understand how to make profits while others are unsure. Below we will uncover some of the various tools and techniques of technical analysis. (For more insight, see Basics Of Technical Analysis.)

Buy and Sell Indicators
Several indicators are used to determine the right time to buy and sell. Two of the more popular ones include the relative strength index (RSI) and the stochastic oscillator.

The RSI compares the inside strength or weakness of a stock. Generally, a reading of 70 indicates a topping pattern, while a reading below 30 shows that the stock has been oversold. (Learn more about this indicator in Getting To Know Oscillators: Relative Strength Index.)

The stochastic oscillator is used to decide whether a stock is expensive or cheap based on the stock's closing price range over a period of time. You will see a reading of 80 if the stock is overbought (expensive); when the stock is oversold (inexpensive), you will see a reading of 20.

RSI and stochastics can be used as stock-picking tools, but you must use them in conjunction with other tools to spot the best opportunities.

Patterns
Another tool that can help you find good short-term trading opportunities are patterns. A pattern is a change in direction up or down in the price of stock and reflects changing expectations. Patterns can develop over several days, months or years. While no two patterns are the same, they are very close and can be used to predict price movements.

Several important patterns to watch for include:
  • Head-and-Shoulders Patterns: The head and shoulders is considered one of the most reliable patterns. This is considered to be a reversal pattern when a stock is topping out. (For additional insight, see Analyzing Chart Patterns: Head and Shoulders.)
  • Triangles: A triangle is when the range between the highs and lows narrows. These occur when prices are bottoming or topping out. As the prices narrow, this will signify that the stock could break out to the up- or downside in a violent fashion. (For more, read Triangles: A Short Study In Continuation Patterns.)
  • Double Tops: A double top occurs when prices rise to a certain point on heavy volume and then retreat. You will then see a retest of that point on decreased volume. At this point, a decline will take place and the stock will head lower.
  • Double Bottoms: A double bottom is when prices will fall to a certain point on heavy volume. They will then rise and fall back to the original level on lower volume. Unable to break the low point, prices will then start to rise. (To learn about tops and bottoms in FX trading, see The Memory Of Price.)
ConclusionShort-term trading uses many methods and tools to make money, however, you must know how to apply the tools to achieve success using this type of strategy. If you can do this, you will be able to make money in both bull and bear markets while keeping your losses at a minimum and your profits at a maximum. This is the key to mastering short-term trading.

Category: Technicals

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