By Brandon Wendell, Online Trading Academy Senior Instructor and Trader Mentor
New traders often become confused when deciding what tools to use in order to analyze the markets and select trading opportunities. Looking at the selections available as well as the tools offered in today's advanced trading software, it is easy for one to become overwhelmed. Fortunately, there is a simple and logistical way to sort through the market ebbs and flows and identify the highest probability, lowest risk trading opportunities.
Figure 1 When we are planning to trade, we need to start from the top. It doesn't matter if you are holding for 10 minutes, 10 days, or 10 weeks. The broad markets always have influence over the stocks making up their components. I have seen this hold true for markets in the U.S., India, London, Dubai, and Singapore. We need to establish the trend and potential turning points (support & resistance), of the broad market before we look to our individual stocks. Most stocks will move further and faster with the market's trend than when they are fighting it. Of course, there are always exceptions. However, even when the stock is trending opposite of the market, they will often reach support and/or resistance at nearly the same time.
Once we know what the market is likely to do during the time frame we are trading, it is important to look at the stock to find the current trend. We want to know the direction of the trend, the strength of the trend, and the possible turning points in that trend (again, support and resistance). By looking at the price and volume, a trader gains most of the knowledge they need to trade without the added use of any indicators. You can ascertain the trend direction and strength by observing the color, size and shape of the candles themselves with volume as a supporting indicator. Looking at the past price action, a trader can also see the most probable turning points, or entry, and exit targets from support and resistance.
For those of you who are not familiar or comfortable with reading price and volume, I suggest you visit your local Online Trading Academy center and take one of our courses that will give you this knowledge. For added information regarding strength of the trend and confirming weakness at turning points, you can use a momentum indicator such as ADX or MACD. Even multiple moving averages offer a clue to a trader looking to determine trend strength. Just remember that you need to rely on price itself to make your entries and exits. Relying on the indicators makes you late as they are all lagging in their movement and signals.
When looking at the possible turning points of price, we can also look at the condition of oscillators like Stochastics, RCI, CCI and others. You have to use them in the correct manner, however. Trying to take all buy and sell signals given by them will not only make you crazy, it will also drain your account. They are to be used to confirm decisions made on price action. Stocks will remain overbought or oversold for a long time in a strong trend. What you need to look for are clues that there is a change in sentiment and price action at a previously identified support or resistance point.
Overall, your trading decisions need to be centered on identifying trends and support and resistance of the broad market and your stock. The technical indicators are decision support tools and may not even be necessary once you become adept at reading price.
I would like to congratulate the staff of the newest Online Trading Academy Center located in Mumbai, India. We have completed our first Professional Trader Class and it was a great success. With the hard work and dedication the staff has put in, I am positive that it will be a shining star in our network for years to come. If you happen to be in India in late October, I welcome you to visit for our grand opening ceremony of the newest expansion of the Online Trading Academy family.
Have a great day.
- Brandon Wendell bwendell@tradingacademy.com
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