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Using Simple Technical Analysis To Find And Make Trades

Technical Analysis of the financial markets works whether the market is moving up or down!

Technical Analysis cannot prophesy peaks and troughs. Nevertheless, it is great at identifying Reversals as well as Trends.

A great deal of wealth may be made recognizing Trends and Reversals.

To help find Potential Trade Opportunities using Technical Analysis charts as a guide, a sound understanding is needed of some core concepts.

There are four solid pillars of Technical Analysis.

They are listed below in order of significance along with the recommended amount of weight that should be placed on each.

Pillar Weight
Trend 50%
Support and Resistance 35%
Volume 10%
( MACD & Stochastic)

Trends - 50%

Trends are the most important indicators of technical analysis trading and can be viewed in terms of:

Long Term Months to Years
Intermediate Weeks to Months
Short Term Days to Weeks

Identifying Trends

A trend can be up, down or sideways. Profits can be made with each. It is useful to identify the trend and trade with it.

In our every day life, we tend to buy things as they get cheaper. In stock trading, though, this should not be the prevailing course of action.

Only buy a falling stock if it is a pull back on an otherwise uptrend. Do not buy if the stock prices are falling and the trend is down.

Wait till they bottom and start to reverse before getting in. Some experience traders preempt and get in before support but that should only be done by nimble and experience traders.

Remember “the trend is your friend” and trading with the trend can make you very happy and wealthy.

Trading against the trend can be deleterious to you financial and mental health.

The Dow Theory Trend Analysis identifies
the following Trends:
Up Trend = A series of higher highs and higher lows
Down Trend= A series of lower highs and lower lows

Up Trend. In drawing your trend lines, try to connect the low points of the up trend.

This is most important to identify support.

Points do not always have to touch. Try to capture about 95% of price activity for the time frame you are targeting.

Down Trend. In drawing your trend lines, try to connect the high points of an down trend.

This is most important to identify resistance.

Always buy or sell with the trend and not against it.

A sideways trend. You can even make money if the trend is sideways and channelling between a high and low point.

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 resitance that they try to preempt is violated.

Support and Resistance - 35%

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 at the same time. So you have the herd acting the same way and confirming these Support and Resistance Levels. 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.

Trend Reversal. 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.

Support and Resistance Levels, however, will inevitably be broken.

When this happens, old Supports once broken become new Resistance and old Resistances once broken become new Supports.

Volume - 10%

Lightly traded stocks create liquidity problems. Mildly excessive trades can create wild price gyrations and the inability to exit your position at the price you want.

You want to trade in heavily traded stocks - at least 500,000 shares daily volume.

Oscillators - 5%

Moving Average Convergence/Divergence (MACD) is a Momentum indicator. It has the most force at the earliest and newest move.

It helps to determine potential buy and sell points in the trade. When we see momentum fading, it might be a good time to get out.

MACD has a center line and is usually shown at the bottom of most Trend Charts. It can be a powerful confirmation of bullish or bearish moves.

A Pull back on an uptrend is to buy, not to bail ....unless the pullback signals a reversal.

A stock tends to move in a 3 to 4 week pattern per cycle. Stochastic looks at the high and lowest prices for the last 3 weeks.

Technical Analysis Dummies Reminders

In conclusion, please consider the following reminders.

  • Do not buy if stock prices are falling. Wait till they bottom and start to reverse before getting in. Some experience traders preempt and get in at support.

  • Remember “the trend is your friend” just as in life “go with the flow” reduces stressful situations. Stress is unhealthy. Avoid it whenever you can. These are truly words to live by. Trading against the trend can be dangerous for your financial health.

  • Also, remember that it is imperative that you develop a method of trading that matches your trading goals and personality, so you can protect yourself from your own weaknesses.

  • Develop a Strategy. (Go here to learn how). Without a strategy, you run the risk of succumbing to alls sorts of emotions and the temptations and stresses that are constantly lurking in the market.

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