Technical trading is not a new term in the stock and commodities market. Almost every trader is aware of this significant trading method. This kind of trading is based on the analysis of historical stock price trends. Technical experts in the stock market use indicators, past stock price trends, and chart readings to predict the market situation in coming future.
Technical trading uses indicators and overlays to predict the financial state of the stock and commodities market. Indicators are the technical tools that help in analysing the behavioural pattern of trends and the traders alike in the past. To muster the art of technical trading you can follow the stepwise analysis of the market, the way John Murphy has devised.
First, it is essential to check with the daily stock price charts. You can scan the daily, weekly, and even monthly charts for the stock price variations. Since technical trading is one of those methods that keeps the historical stock price and volume as the base for the future market trends. Do not take short term market trend as a complete overview of the market situation.
Second, you need to follow the market trends which come in varied sizes including short term, intermediate, and the long term trends. There is a point when stock prices goes down and gets constant. This is the best time to buy the stock. This is called as the ‘support’ in the stock industry. And, the right time to sell your stocks is the ‘resistance’ which is the previous high of price. This becomes the new low.
Third, draw the uptrend and downtrend lines on the stock price chart which will determine when to quit the position and when to enter. Uptrend lines are drawn above the two successive lows and the downtrend lines are drawn above the two successive peaks. If the price crosses any of the trend line, then it is the indicator of the change in market trend.
Fourth, keep up with the moving averages that give an idea of buying and selling in market. After this keep track of the oscillators which confirms the change in the market trends indicated by the moving averages. Two most influential oscillators are reflective Strength index and stochastics.
Fifth you can employ the Average Directional Moving Index (ADX) to know whether the market is in trading or trending situation. If the ADX line shows rise then there is strong market trend and if the line drops down then market shows trading. ADX is influential in moving averages (When rises) and oscillators (when lowers down).
Next comes in the line is Volume which is one of the most important indicators in the technical trading system. Heavy volume should be directed towards holding trend. Last comes the open interest which when rises supports the new money and downtrend in it shows the completion of trend.
Once you have studies all these aspects of the technical trading there is no way you fall out of the market. However, it is necessary for you to keep in mind that this trading method needs constraint study of the stock exchange.
Author Resource:
Jason Hutson is the author of this article on Technical Analysis .
Find more information about Technical Trading here.
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