Using Technical Analysis For Stock Trading

Technical AnalysisMany online stock traders use technical analysis as their primary method of selecting stocks to trade. Some eschew using fundamental analysis altogether arguing that eveything known about a company is already in the price.

Our approach falls somewhere between the two. We use fundamental analysis to determine how the overall markets look, which sectors to trade in and which companies are likely to perform well.

We then use technical analysis, at the ‘micro’ level to determine when to enter and exit positions.

A technician is someone who reads pricing charts and market stats to develop a stock trading plan. The idea is to develop a logical process to identify price trends and trading ranges. Your online broker will provide free or paid for charting packages.

Technical analysis identifies the periods of time in which trends occur and to base trading plans around those trends. And it will very much depend on the type of trader you are, which periods of time make up a potential trend. Clearly a day trader will look for trends that occur in a much shorter time frame than a positional trader. (The differences between the different types of trader are discussed in our Online Stock Trader Types article.)

If, like us, you are primarily concerned with medium to long term trends you need to be analyzing charts showing daily and weekly prices rather than intraday.

We examine charts in search of price levels where buying pressure stops a stock price from falling lower or where selling pressure stops a stock price from climbing higher.

We look for where the ups and downs of the past triggered trading action and can therefore reasonably expect such action to re-occur in future.

The idea is to become familiar with trading patterns and look for trading signals you can act upon. Technical analysis is not a crystal ball for predicting the future but rather a structured method to manage your trading. You will not be right all of the time but you should gain the discipline of when to enter and (perhaps more importantly) exit a trade. We look to technical analysis to improve our online stock trading results rather than base our entire trading rational around it.

Obviously we could write a book on the whole subject of Technical Analysis and we will be adding much more in terms of articles and blog posts as we go along. In the meantime you might want to grab one of the titles below for a more in depth view right now, particularly if you are new to the stock trading game.

Updated: October 7, 2011 by admin