Technical analysis education is the key to successful stock trading. While a number of long-term investors focus primarily on fundamentals, as traders we know that the price movement reflects most accurately what the market thinks of the stock, so we make our decisions based on the technical analysis of price movement. Technical analysis is critical. Without it, you don't stand a chance at trading profitably.
it should go without saying that good technical analysis education is
the foundation of a profit-producing trader. Some fundamentals of good
technical analysis are pivot points, volume shifting and stochastics,
moving averages, and trends. Here today, I'd like to focus on trends.
I'm sure you've heard it before, but I'm going to say it again, "The
Trend is Your Friend".
If you ignore trends, they'll smack you on
the side of the head with as many losses as it takes to get your
attention. But if you take the time to get to know the trend,
understanding its movements, its strengths and weaknesses, you can use
its leverage to your advantage. Get to know the market trend.
going any further, I'd like to point out the difference between the
market trend and current price movement. Pretty basic stuff, but it's
important and so foundational to successful trading. Here's the
A trend can be moving in one direction, while the
current price movement fluctuates up and down. For example, the trend
can be moving up, but that price at any given moment may be moving down.
The price might be going down for a short time, but the overall trend
is still pointing up.
So what does that mean to us as traders?
Well, think of the trend as a magnet that's pulling the stock in a
certain direction. Sure, the stock price is untamed, moving up and down,
seemingly at whim. But the larger trend is clearly pulling the stock in
a certain direction. So the probability of the stock going with the
trend is always greater than the stock moving against the trend. This
means that if a stock is moving in a downward trend, it's always a safer
bet to open a position as the price movement also trends down.
in technical analysis education, the first rule of the trend is to open
trading positions when trend and price movement match.
And how do
we recognize trends? Well, there are a number of stock trading tools to
identify trends, such as moving averages and trend lines, but I'd like
to focus on size: bigger usually carries the most weight.
mean is that if you're looking to enter and exit a trade in one day, you
should take a step back so you can see several days or a couple weeks
of action on that stock. Or if you're looking to enter a position for a
few days or couple weeks, look back at the past month or two to spot a
The bigger the trend, the more weight it carries. If
you see a three-month trend reaching its boundary, be very careful to
trust a single day's trend heading in the other direction. Large trends
get to push around small trends and price movements, so always give them
the most respect.
That sounds pretty simple, but can we always
trust trends? Well, put your technical analysis education to good use
and watch out for these:
1) News- Know that if
news on a company or major stock market news are due to come out, this
may cause the trend to be completely ignored, at least temporarily. So
watch out for the news.
2) Seasonal or time fluctuations-
The volume of stock trading can change drastically with certain seasons
or days of the week, weakening a trend. It's important to learn the
rhythm of the market.
3) Trend boundaries- I
mentioned this a little bit before, but it's worth mentioning again. If a
trend is reaching some point where the market has shown to be stubborn,
the trend may bounce back and reverse trend for a while. It's important
to use trend lines and other analytics to know where these points are.
4) And last but not least, the Unknown-
the market is always allowed to do something completely unexpected and
irrational. That's why it's absolutely critical to have a good stock
trading plan and money management strategy with risk vs. reward ratios
firmly in place.
Spotting trends and moving with price movements
takes a good deal of practice and quality technical analysis education.
So don't skimp on your learning. Spend the time, and when necessary the
money, to prepare yourself to be a successful trader. Below are a few
great sources that will educate you via. demo trading and back testing.