Technical trading has come up in various previous posts. I’ve decided to do a series of posts on technical trading to give a better feel of what it is and how it can be used. This will of necessity only touch lightly on the subject. Whole books are written on each of the indicators and I only have 300 to 500 words to describe a technical indicator.
The essence of technical trading is searching for patterns. One theory of why technical trading should work is that humans are creatures of habit. If faced with a given set of stimuli, as a large group humans will react in the same way. Therefore, if you can identify a given pattern that existed before a favorable result, seeing the same pattern will give you notice that another favorable result is about to occur.
Another theory of why technical trading should work is that large numbers of people think it should. If a large enough group of investors agree among themselves that a given pattern means a certain outcome and then invests in accordance with that belief, they can produce the desired or anticipated result.
Technical trading usually gives signals for very short term phenomenon. In other words, it is giving signals for things that will occur in the next 5 or 10 minutes for some fast twitch indicators, or in the next 5 or 10 days for many indicators, or the next 5 to 10 weeks for the longest series.
Nine Technical Trading Guidelines:
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(Most important = 1, 4, 5, and 9)
1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction of the original move. Generally, when the second move from the sideways range has run its course, a counter-move approaching the sideways range may then be expected.
2. Reversal or resistence to a move is likely to be encountered either (a) on reaching levels at which the commodity has fluctuated for a considerable length of time within a narrow range in the past, or (b) on approaching previous highs or lows.
3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently.
4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken.
5. Breaking of minor trend lines counter to the major trend gives most other important position-taking signals. Positions can be taken or reversed on stops at such places.
6. Triangles of either slope may mean either accumulation or distribution, depending on other considerations, although triangles are usually broken on the flat side.
7. Watch for volume climax, especially after a long move.
8. Don't count on gaps being closed unless you can distinguish between break-away gaps, normal gaps, and exhaustion gaps.
9. During a move, take or increase positions in the same direction of the move, at the market, the morning following any one day reserval, however slight the reveral may actually be, especially if volume declines on the reversal.
Posted by: Bob Hansell | February 28, 2006 12:43 AM | Permalink to Comment