Ten things to understand before you start trading with technical analysis…
One enduring feature of market analysis is the imposition of lines on charts. Two popular ones are support and resistance trendlines. But how useful are these trendlines? Do they really improve our market analysis and trading success?
One observable market fact is that prices are pretty much random. Random in trends; random in changes. No surprise, then, a best-selling market book is called ‘A Random Walk Down Wall Street.’
Previously we introduced a popular indicator called the moving average (MA). This superb indicator is widely used by both amateur and professional alike. Simple to compute; easy to use.
Anyone who runs a marathon knows that momentum matters. It matters a lot because the sheer force of momentum can carry runners further than expected.
In the lexicon of market analysis, an often-used term is a ‘breakout’. But what is a breakout? In short, it describes the moment a stock trades at a new price level, relative to its own history.
Price patterns are recurring price behaviour that are observed visually (and can be modelled by computers). This key here is ‘recurring’. If a price pattern is not repeating, then it is just random noise.
There is an old saying that ‘birds of the same feather flock together.’ In financial markets, this is particularly true.
Catching the peak and buying the bottom are stuff of dreams for many investors. How many traders do you know sold the Nasdaq on Mar 10, 2000, or bought the market on Mar 9, 2009? Very few. In fact, it is so difficult that one should be discouraged from ‘peak catching’. A better speculative method is to act as the trend changes, or, after a trend has peaked.
A question for you: Do you analyse every market instrument every day? I suspect not. The volume of news these days is bigger than what our brains can handle efficiently. Not to mention the dynamic correlations between asset classes, linkages between politics and economics, and the complexities of trade and capital flows.
We briefly discuss Anomalies, Banking Sector, Quantitative Tapering, Stock Buybacks, Valuation & Excesses.
All this knowledge is important. But they are insufficient for you to generate wealth from investing. To successfully investment, there is a cardinal rule you must do: Investment Planning.
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