Technical Trading Observations

The cornerstone principles of technical analysis are
1.  Price action factors in everything,
2.  Price action moves in trends,
3.  History repeats itself.  

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.

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