Study the charts for Trends
Study long-term charts. Begin a chart analysis with monthly and weekly charts
spanning several years. A larger scale map of the market provides more
visibility and a better long-term perspective on a market. Once the long-term
has been established, then consult daily and intra-day charts. A short-term
market view alone can often be deceptive. Even if you only trade the very short
term, you will do better if you're trading in the same direction as the
intermediate and longer term trends.
2. Recognize the Trend and Go With the Trend
Determine the trend and follow it. Market trends come in many sizes –
long-term, intermediate-term and short-term. First, determine which one you're
going to trade and use the appropriate chart. Make sure you trade in the
direction of that trend. Buy dips if the trend is up. Sell rallies if the trend
is down. If you're trading the intermediate trend, use daily and weekly charts.
If you're day trading, use daily and intra-day charts. But in each case, let the
longer range chart determine the trend, and then use the shorter term chart for
timing.
3. Look at the Lows and Highs of stock
Find support and resistance levels. The best place to buy a market is near
support levels. That support is usually a previous reaction low. The best place
to sell a market is near resistance levels. Resistance is usually a previous
peak. After a resistance peak has been broken, it will usually provide support
on subsequent pullbacks. In other words, the old "high" becomes the new low. In
the same way, when a support level has been broken, it will usually produce
selling on subsequent rallies – the old "low" can become the new "high."
4.Calculate How Far to Bounce or dip back
Measure percentage retracements. Market corrections up or down usually
retrace a significant portion of the previous trend. You can measure the
corrections in an existing trend in simple percentages. A fifty percent
retracement of a prior trend is most common. A minimum retracement is usually
one-third of the prior trend. The maximum retracement is usually two-thirds.
Fibonacci retracements of 38% and 62% are also worth watching. During a pullback
in an uptrend, therefore, initial buy points are in the 33-38% retracement area.
5. Draw the Line of trend
Draw trend lines. Trend lines are one of the simplest and most effective
charting tools. All you need is a straight edge and two points on the chart. Up
trend lines are drawn along two successive lows. Down trend lines are drawn
along two successive peaks. Prices will often pull back to trend lines before
resuming their trend. The breaking of trend lines usually signals a change in
trend. A valid trend line should be touched at least three times. The longer a
trend line has been in effect, and the more times it has been tested, the more
important it becomes.
6. Follow that Average
Follow moving averages. Moving averages provide objective buy and sell
signals. They tell you if existing trend is still in motion and help confirm a
trend change. Moving averages do not tell you in advance, however, that a trend
change is imminent. A combination chart of two moving averages is the most
popular way of finding trading signals. Some popular futures combinations are 4-
and 9-day moving averages, 9- and 18-day, 5- and 20-day. Signals are given when
the shorter average line crosses the longer. Price crossings above and below a
40-day moving average also provide good trading signals. Since moving average
chart lines are trend-following indicators, they work best in a trending market.
7. Learn the Turns
Track oscillators. Oscillators help identify overbought and oversold markets.
While moving averages offer confirmation of a market trend change, oscillators
often help warn us in advance that a market has rallied or fallen too far and
will soon turn. Two of the most popular are the Relative Strength Index (RSI)
and Stochastics. They both work on a scale of 0 to 100. With the RSI, readings
over 70 are overbought while readings below 30 are oversold. The overbought and
oversold values for Stochastics are 80 and 20. Most traders use 14-days or weeks
for stochastics and either 9 or 14 days or weeks for RSI. Oscillator divergences
often warn of market turns. These tools work best in a trading market range.
Weekly signals can be used as filters on daily signals. Daily signals can be
used as filters for intra-day charts.
8. Know the Warning Signs
Trade MACD. The Moving Average Convergence Divergence (MACD) indicator
(developed by Gerald Appel) combines a moving average crossover system with the
overbought/oversold elements of an oscillator. A buy signal occurs when the
faster line crosses above the slower and both lines are below zero. A sell
signal takes place when the faster line crosses below the slower from above the
zero line. Weekly signals take precedence over daily signals. An MACD histogram
plots the difference between the two lines and gives even earlier warnings of
trend changes. It's called a "histogram" because vertical bars are used to show
the difference between the two lines on the chart.
9. Trend or Not a Trend
Use ADX. The Average Directional Movement Index (ADX) line helps determine
whether a market is in a trending or a trading phase. It measures the degree of
trend or direction in the market. A rising ADX line suggests the presence of a
strong trend. A falling ADX line suggests the presence of a trading market and
the absence of a trend. A rising ADX line favors moving averages; a falling ADX
favors oscillators. By plotting the direction of the ADX line, the trader is
able to determine which trading style and which set of indicators are most
suitable for the current market environment.
10. Know the Confirming Signs
Include volume and open interest. Volume and open interest are important
confirming indicators in futures markets. Volume precedes price. It's important
to ensure that heavier volume is taking place in the direction of the prevailing
trend. In an uptrend, heavier volume should be seen on up days. Rising open
interest confirms that new money is supporting the prevailing trend. Declining
open interest is often a warning that the trend is near completion. A solid
price uptrend should be accompanied by rising volume and rising open interest.
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