When it comes to stock trading, there are basically two schools of thought. Some traders swear by fundamental analysis and others are of the opinion that technical analysis is the only way to predict market movements.
Technical analysis involves studying past movements in trading volumes and prices of a market instrument and using that information to try and predict future movements. Traders following this approach therefore implicitly believe that the market will repeat itself under a given set of circumstances. Their opponents believe that the market has no memory – there are no guarantees that it will ever repeat the same behavior twice.
Since you find traders who consistently make money in both camps, it’s logical to conclude that both approaches could be successful if applied systematically over a period of time.
Charts form the main arsenal of the technical analyst. These charts are used to portray changes in a large number of so-called technical indicators. The most popular chart types used by traders are: OHLC (Open High Low Close) charts, line charts and candlestick charts.
There are mainly four types of technical indicators which are normally displayed graphically by using the above charts. These are volatility indicators, volume indicators, trend indicators and momentum indicators.
Some of the better known trend indicators are the numerous moving averages, Parabolic SAR and MACD. If you, like many traders, believe that you should always ‘trade with the trend’ these indicators will be of great help to you in determining when the market has moved into a trend.
A few of the most popular trend indicators are MACD and the Parabolic SAR indicator. Many indicators believe in always trading with the trend and if you are one of them, you will find this type of indicator very useful.
Volatility indicators, such as the ATR (Average True Range), depict ‘normal’ price ranges graphically, so that a trader can easily see when the price breaks out of this normal range – which might indicate a major price movement.
Volume indicators show trading volumes in a particular period. High volumes combined with a price movement is a strong indication that the market feels strongly about that particular price movement.
If you are a novice trader, it is highly recommended that you become familiar with the workings of the various technical analysis tools available to a trader.
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