The world and markets are awash in information. The ever-present talking heads on 24-hour news/business channels, online news aggregators, and the chatter of the investment boards where every thought both perceptive and fallacious is expressed can lead even the most seasoned trader astray. And so, it can be a daunting task to find one’s path to the truth in the cacophony of the competing agendas and views in the media of our present day.
Finding a clear path as a trader to the truth can be done with the daily study of the chart patterns and transaction volumes of the stocks/ instruments under consideration. With experience and education, a good trader will be able to understand the twin forces of demand and supply in the daily action that affects prices, as well as, the psychology behind the moves. It takes time, but it is worth the effort.
Where to start? As in most endeavors, the road can be made much easier by studying the works of those that have gone before. One of the most widely read tomes on stock charts “Technical Analysis of Stock Trends” by Edwards and Magee is a good primer for new traders and should be reviewed/browsed yearly by the experienced trader. First published in 1948 the book has been updated to be relevant to the twenty-first-century reader. One might ask “why it is still suited to today’s traders?” That question is easily answered by the fact that human nature as chronicled in the charts of 70 years ago is still instructive to us. Human nature and emotions that drive traders today are the same as they were back then. Complacency, fear, greed, revenge, capitulation all show up in stock charts.
Keeping one’s analysis simple and free of the complications from the multitude of indicators/studies that are available is of the utmost importance. Just remember, all technical studies are based on one or two things: price (which may include any combination of the open, high, low, and close) and volume. That is it. So, learning the basics of chart reading is paramount to the full understanding of technical studies. It is price and volume which drive the indicators such as Moving Averages, RSI, Stochastics, and MACD, etc. So having a firm understanding of the patterns as it relates to trend, support, and resistance is key to understanding when to utilize or fade a technical study. For instance, a strongly trending stock in either direction will result in consistent over-bought or over-sold readings on an RSI which may influence a trader to make ill-advised counter-trend trades.
Just remember, price and volume are the ultimate arbiters of truth when it comes to stock trading. It is these two ingredients that dictate the profit and loss in a trader's account. When one masters these basics, price and volume, they will unlock a great deal of potential profit for the trader. As always, keeping it simple and doing more of what is working, and less of what is not working. The truth is in the stock chart.
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