1 0 Tag Archives: MACD
post icon

Technical analysis of stock trends

If you have ever indulged in any form of stock trading, you would definitely have taken a look at a price chart at some point in time to study price movements. For many investors and analysts, a stock price chart is the starting point for carrying out an analysis and even people who do not believe in technical analysis use charts from time to time. Charts can provide a lot of information in a very short space of time.

For instance, if you are looking at long-term investment, you can take a quick look at a price chart of say five years and determine at a single glance how investors have been rewarded. If you see a lot of upward and downward price movements, obviously the stock is much more volatile than a stock where the movement is relatively even. However, if you know how to read a chart properly, that is a lot more information you can gather and then these simple self-evident facts.

It is important to remember that charts can generate two types of trading information that can be used to forecast future price movements. A continuation pattern suggests that the trend being studied will continue while a reversal pattern suggests that the direction of the trend is about to reverse. Charging does not pretend to be an exact science [except to its most ardent proponents] and the use of patterns and their identification can be a difficult process which involves subjective judgment.

A fundamental principle of technical analysis is that a market’s price reflects all relevant information, so their analysis looks at the history of a security’s trading pattern rather than external drivers such as economic, fundamental and news events. Price action also tends to repeat itself because investors collectively tend toward patterned behavior – hence technicians’ focus on identifiable trends and conditions

While fundamental analysts examine earnings, dividends, new products, research and the like, technical analysts examine what investors fear or think about those developments and whether or not investors have the wherewithal to back up their opinions; these two concepts are called psych (psychology) and supply/demand. Technicians employ many techniques, one of which is the use of charts. Using charts, technical analysts seek to identify price patterns and market trends in financial markets and attempt to exploit those patterns. Technicians use various methods and tools, the study of price charts is but one. Technicians using charts search for archetypal price chart patterns, such as the well-known head and shoulders or double top/bottom reversal patterns, study technical indicators, moving averages, and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants, balance days and cup and handle patterns. Technical analysts also widely use market indicators of many sorts, some of which are mathematical transformations of price, often including up and down volume, advance/decline data and other inputs. These indicators are used to help assess whether an asset is trending, and if it is, the probability of its direction and of continuation. Technicians also look for relationships between price/volume indices and market indicators. Examples include the relative strength index, and MACD. Other avenues of study include correlations between changes in options (implied volatility) and put/call ratios with price. Also important are sentiment indicators such as Put/Call ratios, bull/bear ratios, short interest, Implied Volatility, etc.
There are many techniques in technical analysis. Adherents of different techniques (for example, candlestick charting, Dow Theory, and Elliott wave theory) may ignore the other approaches, yet many traders combine elements from more than one technique. Some technical analysts use subjective judgment to decide which pattern(s) a particular instrument reflects at a given time and what the interpretation of that pattern should be. Others employ a strictly mechanical or systematic approach to pattern identification and interpretation.
Technical analysis is frequently contrasted with fundamental analysis, the study of economic factors that influence the way investors price financial markets. Technical analysis holds that prices already reflect all such trends before investors are aware of them. Uncovering those trends is what technical indicators are designed to do, imperfect as they may be. Fundamental indicators are subject to the same limitations, naturally. Some traders use technical or fundamental analysis exclusively, while others use both types to make trading decisions.

Characteristics of technical analysis

Technical analysis employs models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, business cycles, stock market cycles or, classically, through recognition of chart patterns.
Technical analysis stands in contrast to the fundamental analysis approach to security and stock analysis. Technical analysis analyzes price, volume and other market information, whereas fundamental analysis looks at the facts of the company, market, currency or commodity. Most large brokerage, trading group, or financial institutions will typically have both a technical analysis and fundamental analysis team.
Technical analysis is widely used among traders and financial professionals and is very often used by active day traders, market makers and pit traders. In the 1960s and 1970s it was widely dismissed by academics. In a recent review, Irwin and Park reported that 56 of 95 modern studies found that it produces positive results but noted that many of the positive results were rendered dubious by issues such as data snooping, so that the evidence in support of technical analysis was inconclusive; it is still considered by many academics to be pseudoscience. Academics such as Eugene Fama say the evidence for technical analysis is sparse and is inconsistent with the weak form of the efficient-market hypothesis. Users hold that even if technical analysis cannot predict the future, it helps to identify trading opportunities.
In the foreign exchange markets, its use may be more widespread than fundamental analysis. This does not mean technical analysis is more applicable to foreign markets, but that technical analysis is more recognized as to its efficacy there than elsewhere. While some isolated studies have indicated that technical trading rules might lead to consistent returns in the period prior to 1987, most academic work has focused on the nature of the anomalous position of the foreign exchange market. It is speculated that this anomaly is due to central bank intervention, which obviously technical analysis is not designed to predict. Recent research suggests that combining various trading signals into a Combined Signal Approach may be able to increase profitability and reduce dependence on any single rule.

Go to the article »
02. Feb, 2012
post icon

Trending and Trading Markets – Finding The Correct Indicators For Each

A trending market is one where prices move strongly in one direction, either up or down. The best way to visualize this price pattern is by drawing a line that follows the slope of the prices. Another hallmark of a trending market is the steady move to new highs and higher lows. Conversely, in a down trending market prices would be making lower lows and lower highs.

Trading markets don’t make new highs. There is no discernible persistent move in either direction. Prices tend to ping back and forth near old highs and then fall to prior lows. Sketching this type of price action would reveal a series of peaks and valleys.

Trending markets need lagging indicators. Moving averages (simple, weighted, exponential) are in this category as is the MACD (it also has a leading component, too). These indicators will maintain you in a trend as long as the trend remains intact. Lagging indicators are unsuccessful in a trading market — moving averages tend to flatten in a sideways market and offer no useful information.

There will always be periods of consolidation in the markets to frustrate traders. The Relative Strength Index (RSI), Stochastics Oscillator, and Williams %R are some of the common indicators found in most charting software. These tools swing between oversold and overbought and are usually bounded by an upper and lower range.

Trading markets can be difficult to trade. Despite the use of oscillators there will be an increased frequency of trading signals, both buys and sells. Many of the signals will be false and whipsaws are very possible.

One of the best ways to harness a trading market is to discover the support and resistance range on the chart. The odds for success can also be increased by taking only the most overbought and oversold signals.

Attempting to participate in a trading market can be very frustrating. The more trading one does the more we find our comfort levels. There is nothing wrong with taking a little trading vacation and waiting for market conditions that mesh your style.

I hope you’ve found a few ideas that will work for you. Good luck with your trading.

Go to the article »
19. Jul, 2010