Technical analysis is the most commonly used approach utilized by day traders who are speculating on a day to day basis to profitably navigate the markets.
While there are a myriad of ways to approach technical analysis and even more patterns to recognize, just a few key points will be of an immense help to zero in on what actually works and ultimately develop a successful strategy.
Technical Analysis Explained
What is Technical Analysis and how does it differ from Fundamental Analysis?
Technical analysis is the study of price action on a chart while fundamental analysis is when you analyze a company’s financials like there balance sheet and income statements to determine if they are under or over valued.
So, the technical analysis theory assumes that the current price is reflective of all the most currently available information on a particular stock.
Thus, we can assume that by using historical price action we can predict future movements with a high probability. There is a short reminder of how I remind myself of the significant influence technical analysis has and that is, “The technicals will you tell what the fundamentals are doing.”
In other words, if you are able to identify strength or weakness in a chart you can accurately predict, at least in the short term, where the stock can move and as day traders this is very valuable information.
Quick Tips To Jump-start Your Technical Analysis
- Identify Key Support/Resistance
While viewing a stock’s long term chart, at least 1 year in length, you want to look for any major areas that have clearly acted as a support/resistance point in the past and see if this area holds true for present price action.
If so, you have successfully identified a significant level and can expect the stock will react to this same level once it reaches it again.
- Identify Trend
It is very important to recognize if a stock is in a defined trend, whether it be up or down. Identifying a long term trend utilizing trend lines to draw ascending support or descending resistance can be useful in understanding the stocks latest sentiment.
For example, if a stock is in a long term uptrend and negative news hits causing the stock to gap sharply lower, thus breaking the latest trend, can be a huge catalyst for the stock to continue moving lower which creates an extreme situation where day traders can take advantage of the profitable opportunity.
- Understand Potential Range
Understanding and acknowledging the potential range after a stock moves through a support/resistance trigger level is crucial so you can plan your exits accordingly.
The most efficient way to understand what range a stock normally trades in is by using an indicator known as the ATR, or, Average True Range. The ATR will be displayed as a number which will be the average range the stock moves on any given day.
However, to get a more accurate depiction of how far the stock can move you need to be able to plot support/resistance points. The distance between these points, or “pockets”, is the space the stock can move once the support/resistance level is broken which will then allow you to pick your exits.
- Identify Volume Profile
Volume is the most important factor to my trading and consider it the most accurate indicator by leaps and bounds. Volume precedes price and if you can identify volume profiles you will be well ahead of any indicator that exists since they are derived from volume and price movement.
So, when a stock is at a significant level and volume begins to uptick this is a potential situation of an extreme impending move. Identifying a volume anomaly creates a significant trading edge which can be leveraged in both day and swing trading to put yourself ahead of the crowd and capture the majority of the move.
These 4 vital criterion will allow you to successfully put together a successful approach to technical analysis, and ultimately boosting your earning potential!