Warrior Trading Blog

The Trader & The Technical Approach

The Trader & The Technical Approach

Fundamental analysis is a method of evaluating a security in an attempt to measure its intrinsic value, by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts study anything that can affect the security’s value, including macroeconomic factors such as the overall economy and industry conditions, and microeconomics factors such as financial conditions and company management. The end goal of fundamental analysis is to produce a quantitative value that an investor can compare with a security’s current price, thus indicating whether the security is undervalued or overvalued.

Furthermore, an investor will look for strong fundamentals but a great trader will be seeking for the strongest technical pattern before operating (take a look to this previous article for more about it). Indeed, day trading seeks a catalyst such as a breaking news to justify the trade and understanding how to read charts is critical in day trading.

Every successful trader has to have the capability to recognize good patterns among countless different setups. Charting is part of technical analysis, where the main point is looking for breakouts and levels of support/resistance to anticipate a potential move (a spike in volume will be the ultimate indicator that this is happening).

The use of technical indicators has always been at the center of animated discussions among traders. The so-called “holy grail” (combining multiple technical indicators to get 100% success rate) simply doesn’t exist. Adding too many technical indicators is not helpful for active trading because these ones lag behind price / action instead of anticipating them and they can make the charts much more difficult to read.

Get Use To Reading Live Charts

Being able to interpret charts in real-time increases the success rate dramatically. Give yourself time to accrue enough experience for being able to naturally recognize and filter the best setups only. Especially for day traders, the main focus is on daily charts and intraday charts. In fact, a well-done charting layout contains at least: 1 minute, 5 minutes and daily chart. A strong daily chart, together with the right intraday set-up is the most promising premise for winning trades.

When watching into a daily chart the key point is on identifying windows which are areas of no support/resistance. The larger the windows are, the better. As a generic rule, big average true range (ATR) are preferable and best setups usually occur into big windows. The ATR is the average move of a stock on a daily basis. A situation with several big windows lined up is ideal because it increases the likelihood for a big breakout. Gap filling occurs when price / action is strong enough to cover the window until the next support/resistance. Ultimately, understanding how to read a daily chart will help determine the most favorable risk/reward ratios.

In day trading, have a good view of intraday patterns is critical. In fact, a good intraday chart can override a not perfect daily one but it’s not quite the opposite because shorter timeframe momentum can have bigger impact than a technical level of support/resistance on a wider time span.

Keep always in mind that there are two key ingredients to look for a real promising setup: high relative volume and a catalyst. With that said, promising chart patterns are the so-called bull/bear flags and flat top/bottom break-out. These are good patterns as part of trading strategies.

The bull flag pattern prerequisite comes with a pullback after a price spike. Then, after a relatively short consolidation time, a new move up over the previous high takes place. The bear flag happens in the exact same way, but it goes down instead.

The flat top breakout forms with a less pronounced pullback after a new high. Then, a cooling period of consolidation (usually tapping multiple times on a mental resistance on the ½ or round dollar) opens the gates with a breakout to new highs.

See you in the chat room.

Trade safe,

Roberto Barbaro