Technical analysis is the foundation of our trading style. Trading is all about timing the markets to catch strong trends, and the best way to time the markets is with technical analysis. Technical analysis catalogs market data and establishes a system for finding trade ideas, picking entries & exits, and managing risk. Fundamental analysis will show you what your bias should be on a stock. But it doesn’t show you when a stock will move, in what direction, and for how long it will trend. Technical analysis encompasses nearly all of your trading decisions from steps A to Z.
Using Technical Analysis To Trade Momentum Stocks
My goal as a trader is to enter a stock when it has momentum and ride it out until the momentum is gone, and then cash out. Technical analysis shows you what areas on a stock’s chart there is high probability for momentum beginning and ending. This allows you to use your capital efficiently, and not have your capital tied up in a stock that is just trading sideways. As momentum traders we need our cash to constantly be in movement in stocks that have the potential to trend in the direction of our purchase (or short). Technical analysis can give us the tools we need to time any stock or index.
Supply and Demand
Stock charts allow us to measure the collective market actions of all traders in a graphical format. The stock market is essentially just one giant auction with buyers & sellers. Markets are moved by two simple forces: Supply and Demand. Technical analysis shows you at what price levels are likely to be levels of supply and demand. When you know where there are levels of supply and demand, you will have an idea of where buyers and sellers will likely enter the market. When you have an idea of where buyers and sellers might enter the market, you have a way of assigning probability to where you buy and sell a stock.
Technical Analysis Does Not Change
Over the years, many aspects of the market have changed: The advent of hedge funds, high frequency traders, government bailouts ect. This gives many traders the impression that the market is constantly changing, random, and unpredictable. Many believe that the market cannot be beaten over the span of a long period of time. However through all of these changes, the tools and technical analysis will still be valid for this reason: The world may change, and market may change, but human nature never changes.
No matter how many algos and computerized traders enter the market, these systems are still created and managed by humans. As a result, they are still subject to the same emotions that every human trader deals with: Greed and fear. In the years I have been trading (since early 2000’s), so much about the world and the markets have changed. But my method still works, as it is based on reading price action via charts. The charts will always give an objective look of what is happening with market participants and what they are doing with their money.
Now that you understand the importance of learning technical analysis, our next blog post will show you the basics of reading a chart. I look at an average of 1000 charts a day. Learning to read a chart correctly is not an overnight process. In order to cut the learning curve for you, we will show you how you can learn to read a chart in our next post to turn what looks like chaotic, random data into a concise picture of what a stock will do next.
Sign Up For The Free 4-Day Live Course
If you missed our first post of the Bulls Elite Series about the different styles of investing, you can check it out here. We will go in depth about all the components of technical analysis and charting in our free 4 day live course on July 22nd.
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