Technical analysis - mastering the basics
How do we time trades? Entry and exit may be wise based on circumstances, but timing is the key to making smart moves well-timed moves as well.
I have found myself focusing on the importance of confirmation before acting, even on strong reversal signals. I find many sources for reversal as well as confirmation, including:
1. Candlestick indicators that hint at a coming reversal. Many of these are very reliable. For example, the two-session engulfing pattern leads to reversal nearly 80% of the time.
2. Volume spikes reveal great interest in the current price, and appear often right at the top of an uptrend or at the bottom of a downtrend. These spikes are exceptionally good confirmation.
3. Western indicators including price gaps, head and shoulders, double tops and bottoms, and wedges, among others, all help you to time entry and exit with expertise.
4. Moving averages and how they interact with price, specifically crossing over to continue above or below current price levels, help to bring order to the chaotic nature of short-term price, and may confirm other signals.
5. Momentum oscillators measure the speed of price trends, and help identify when those trends begin to slow down, showing often subtle changes into overbought or oversold conditions, making these valuable signals.
6. Proximity of all of these types of reversal signals, meaning specifically that when you see reversal indicators at or close to resistance or support, pay close attention. At these edges of the trading range, reversal is more likely than anywhere else.
Technical analysis is both science and art. When used to augment fundamental analysis, it helps you to better time entry and exit. But this area of analysis is also complex, so it deserves your careful study. One way to get started is by downloading a free introductory explanation of technical; analysis from the international education company, Ethan Hathaway. Their offer can be downloaded at http://tinyurl.com/8qn4c9j
Michael C. Thomsett is a prolific blogger and helps investors and traders with trading education. He also has written dozens of trading and investing books and writes fulltime from his home near Nashville, Tennessee.
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