The cornerstone principles of
technical analysis are
1. Price action factors in
everything,
2. Price action moves in trends,
3. History repeats itself.
Trend
Trend is the most important factor in every technical trade.
Trend is the direction of trading.
There are three primary
directions Up, Sideways, Down
and two minor directions Up a
little and Down a little.
A trend is defined by Highs and Lows.
Price trends or consolidates.
Trend occurs in multiple time frames. On a daily chart Short-term is two days plus,
Intermediate-term is two to eleven months and Long-term is one year plus.
It
has been said:
The trend is your friend…
The trend is your friend until it
bends…
The trend is your friend until it
ends…
The trend is your friend until a new
one begins.
A trend ends with a change in Highs and Lows.
A
long term uptrend is often referred to as a
bull market while a long term downtrend is often called a bear market.
Support and Resistance
Support is a price level where demand is greater than supply.
Resistance is a price level where supply is greater than demand.
Horizontal
lines are used to identify support and resistance
levels.
Support and resistance are zones or areas rather than a to the
penny price, even though they are usually drawn on a chart at a single price
level.
Horizontal
resistance is a price level where supply was
greater than demand and price fell. A
horizontal resistance line can be drawn from a single price point and represents
an actual supply area.
Horizontal
support is a price level where demand was
greater than supply and price bounced. A
horizontal support line can be drawn from a single price point and represents
an actual demand area.
All Price patterns are nothing more than support and resistance. Price patterns are different combinations of horizontal
and/or diagonal support and resistance.
Remember
breakouts typically test about 70% of the time.
Stocks
below support should generally be traded bearishly until a reversal pattern
forms.
Momentum
Japanese candlesticks commonly
referred to as candles are real-time
momentum indicators.
Candles visually show three things
about the market:
1. Who’s in control, buyers or
sellers
2. The strength of those in control
3. If a shift in control or a short-term trend reversal might be
likely
Candles are real-time and the fastest short-term reversal tool I
know.
Candles show the buying and selling pressure in
real-time.
Candles are price action.
Candles visually show
1. If an up or down day
2. The strength of the buyers and
sellers
A trader must identify the preceding short-term trend to correctly
interpret candle patterns.
Candle patterns at support or resistance are even more significant.
The message of the candle is more important than the name. Remember traders trade price action not
names.
Oscillators lag.
Oscillators are mathematical distortions
or manipulations of price turned into statistics which are then turned into
pictures.
Indicators
can be helpful, however you should remember
that indicators are lagging and secondary to price. If
the price action is up and the indicator is still pointed down, follow the price. “Price is king” means price is most
important.
Trading Insights
Create trading rules.
Trading rules should address five
key areas
1. What to trade
2. When to enter
3. How much to trade
4. When to exit
5. Daily routine
A
successful trade is any trade in which a trader
follows their rules. It’s not whether
they made money or lost money, on a trade, it whether they followed their
rules.
Trading is a decision making process.
Good trading requires focus, effort and concentration.
To produce consistent results a trader must be consistent, disciplined,
organized and systematic.
If a trader is producing
inconsistent results they are most typically taking inconsistent actions.
Trade with the trend to increase the probability of success.
Trade with the trend of the
chart you are trading and continue to move
your profit protection stops. Continue to follow
your rules.
Follow
your rules and look for potential re-entry
if you were stopped out of any profitable trades.
Technical analysis based trades should be closed before
earnings.
Trade
what you see, not…
Observations by Dave Johnson
©
