Stocktrades.ca previously discussed the major differences between fundamental and technical analysis. While both types of analysis may be used to recognise how prices might move, they also have different concepts and disciplines. On a broader scale, fundamental analysis is the examination of how the market reacts to news, investor sentiment, and other events. Technical analysis is predicting price changes by examining the movement and activity of the investment in question.
Technical analysis can be quite complex because it means studying years of historical data. For professionals using technical analysis, price is the only truth.
In order to get a good grasp of technical analysis, Nadex suggests that through training courses investors must first master looking for patterns to gain an understanding of the market. Is a stock making higher highs or higher lows repeatedly? If the answer is yes, then it’s on an uptrend, and the best course of action is to go with that trend. Once you can easily spot trends, you can move on to learning about averages, which is the basis of most technical indicators such as Stochastics or the Moving Average Convergence Divergence (MACD).
Learn support and resistance
Apart from spotting patterns, knowing the support and resistance price points is one of the fundamentals of technical analysis. Every indicator is essentially linked to the price and repetition of an investment’s growth and retraction.
Make an observation of how an investment’s prices have fluctuated recently, as well as where the levels of resistance and support are. Resistance is the price mark that an investment is finding it hard to break from. Support, on the other hand, is the lowest price level that an investment settles into. Developing an eye for support and resistance will enhance your ability to see trends more easily.
Use at least two indicators
Using only one technical indicator is dangerous. The concept behind this is simple: more indicators mean that you will have more data to back your investment decisions.
For example, you can use the 200-day moving average of a stock on the S&P 500 as a basis. But don’t solely rely on that and instead, also use data from Dow, as your second indicator, to improve your odds of making the right decision.
Remember that you will never be right all the time, so improving your odds is a must. However, don’t use too many indicators to the point that you can hardly read a pattern, which investors call “analysis paralysis.” Use indicators that work well with each other.
Broaden Your Time Frame
It’s easy to get lost when you habitually scan charts every five minutes to read signals. While scanning charts is necessary in order to make a trade decision, identifying long-term trends in a price is essential to see patterns better.
Make it a habit to start your technical analysis by using weekly charts. After that, check the intraday charts. From those two types of charts, you can easily identify where you should place your entry and exit points of any trade.
When you have the same buy or sell signal using daily or weekly time frame, you will have confidence that the indicator is telling you the truth. While you may not get multiple time frame confirmations all the time, look hard for them anyway. When in doubt, expand your time frame to see the bigger picture.
Remember, despite spotting indicators, you will still lose sometimes. Compensate for your losses by enforcing strict risk-management principles. Examining your losses may give you an insight on how to avoid them in the future.