Technical Analysis is the weapon of choice for most Day Traders as fundamental analysis takes too much time for the average trader. But what is Technical Analysis?
Technical analysis is the study of how prices of stocks, futures etc change, statistics is used to predict future price movement from historical data.
It’s essentially making a prediction of where price will go by looking at its past behaviour. This may not seem very reassuring but it’s important to realise that price movement is basically determined by people, the traders. Crowd psychology has shown that we as humans act in a certain consistent way when taking part in a group activity such as trading. So statistics points out the patterns in our human behaviour and gives us a way to predict the future.
Technical Analysis is a huge field and it covers many indicators. So many traders (me included ;)) have spent lots of unnecessary time looking for a ‘special’ indicator that will be the answer to trading but i can reassure you that no one has found that yet.
My advice is to learn the following basics well and completely understand them. This will save you many hours searching the internet looking for secrets.
Price Action – Understanding Market Movements
People move markets. So understanding people and how they react when under fear and pressure is vital information to any trader. It’s important to remain emotionless when trading so that you can clearly see what the crowd is doing. This is how you separate yourself from the rest of the crowd to make your own market decisions.
Important Trending Indicators
- Moving Averages. Moving averages are the foundation of all technical analysis and the majority of all traders worldwide make use of them. Moving Averages are essentially the average price of a trading instrument over a specific time frame. Traders primarily use moving averages to determine trend direction
- Trend Lines. Trend lines are used heavily by seasoned professionals because they require knowledge and experience to implement properly. Typical uses are to determine trend direction and also common chart formations such as wedges or head and shoulders formations etc.
Important Trading Indicators
- RSI. RSI is my favourite oscillator because its very simple to understand. Its also used heavily by traders which makes its signals pretty accurate. Traders typically use it to identify overbought and oversold conditions and also as a price divergence check.
- Stochastic. The Stochastic is very similar to the RSI and it generally easier to read. It gets applied in the same manner as the RSI for identifying overbought or oversold conditions and for checking divergence
Candlestick charts are the standard chart setting for most brokers charting software but few traders actually realise the power of candles. Candlestick Patterns were identified and formalised in Japan but they can literally be used in any market.
Volume can be hard to understand at first but it can give great insight into the validity of market moves. It’s also a leading indicator and can thus give pre-warning of future price moves if read and interpreted correctly.
These are the indicators I suggest you master before delving into pivot points or Elliot waves. This will also provide you with a deeper understanding of what drives a market. Remember that the market is alive and its life force are humans (traders) so if you ever stuck just look at life in general because there are marked similarities.