Penny Stock Tips.
The key to success in trading is to identify the best places to buy or sell an asset. The challenge is to identify the exact places to enter the trades. This is because there are many causes of movements in price of currencies and equities. The main cause of these movements is the demand and supply. The two are affected by ‘smaller’ factors which traders need to understand. Therefore, to make trading decisions, traders use two main types of analysis; fundamental and technical analysis. The former looks at the overall market conditions and narrows it to the specific asset while the latter aims at analyzing the charts and finding specific patterns.
In technical analysis, the trader looks at the chart and combines this skill with built-in indicators to predict how the chart will move in future. The basic principle of technical analysis is that nothing happens in the market that has never happened before. Alexander Elder, one of the main authoritative figure in the field and author of many books has talked about this principle for years. It has also been echoed by other successful money managers like Ray Dalio and James Simmons of Renaissance Technologies. As such, applying mathematical formulas and tools can help identify past trends and then predict what will happen in future. In addition, technical analysis assumes that fundamental factors are linked to the price behavior of an asset.
To be a good technical analyst, you need to understand a number of principles. First, this type of analysis is more suitable for short-term trades. This is because for long-term trades, prices move because of the demand and supply. For instance, in the last few years, the price of crude oil has moved from a high of $145 a barrel to a low of $26. The reason behind this was the increased supply of crude oil. It is therefore advisable to use technical analysis for day and swing trading.
The second principle is that the number of indicators you use does not increase the accuracy of your trades. Many people have the habit of overlying tens of indicators in their trading platforms and analyzing them. The problem with doing this is that not all indicators are suited for certain charts. The secret is to identify a few indicators and master them. Three to four indicators are enough to create a working trading strategy.
The third principle is that the same indicator applied to the same chart can produce different results. How does this happen? It boils down to the time you are analyzing. For instance, a moving average indicator applied to a 5-minute chart will likely produce a different result with one that is placed in a 30-minute chart. Also, a 10-day moving average placed in a chart will produce different results with a 30-day moving average placed in the same chart. Therefore, it is very important to look at the minor details when applying indicators in charts.
For effective use of technical analysis, one needs to combine it with fundamental analysis which looks at the overall market environment and narrows it down to the specific asset. For instance, if the fact is that other market segments will be affected. This is because China is the largest consumer of goods produced in other countries. As the volatility increases, buying opportunities in the safe havens like gold will emerge. If you were using technical indicators alone, chances are that you would miss that opportunity.
Technical analysis, just like all forms of analysis, is not 100% accurate. Occasionally, your preferred indicators will give you the wrong signals. The key to success is to have the best risk management strategies to limit the amount of money you can lose per trade. Also, feel free to create and use your own trading models. Finally, remember that technical analysis is changing the world with the introduction of high frequency trading (HFT) where algorithms – created primarily by technical indicators – are controlling the movements of assets.