Technical Analysis (more significant short term)
- The discipline of predicting the most probable (60%) chance future direction, timing, and/or magnitude of market movements.
- Main focus is on past movement contained in that market or markets
- All market analysis focuses on probabilities not certainties.
What works with technical analysis
- Buying and selling pressure are what move markets
- Patterns are just formations formed by buying patterns
- Trading is a game of probabilities not predicting
- Understanding that trading success comes from trading skill not technical analysis
Fundamental Analysis (less significant on short time frames)
- Balance sheet analysis
- Quality of earnings, margins
- SWOT analysis
- Assessment of management
- Competitive position in the industry
- Profitability / Capital Structure
- Highly specialized individuals tend to know more about stock than average investor has information to understand.
- Not focused on stock price itself rather than fundamentals
FOUR principals of price behavior
- Markets alternate between trending and trading ranges
- Trends once in motion are more likely to continue than to end
- Trends once they do end tend to end in one of two ways
- There are characteristic patterns for support and resistance holding or failing
Why understand principals of price behavior is important
- What works in a trend is exactly the opposite as what works in a trading range and vice versa.
- If you incorrectly identify the market you are in. You will lose.
- Most traders / public tend to lose interest in a quiet market. This however is exactly the point when stocks tend to break out and trend again.
- Do not assume a change of trend when trend ends. They tend to move into a trading range.
- The easiest money is made trading with the trend.
- You can make money fading a trend however this is much harder.
Two Ways Trends END
- Resistance starts to hold and moves into a range.
- Parabolic end with blow off top/bottom and subsequent sharp reverse in trend
Pattern around support and resistance holding
- Price gets close to level and immediately gets pushed away with 3-5 bars.
- Immediate sharp test of support which holds.
- Sense that price doesn't want to be there.
Pattern around support and resistance failing
- Price gets near a level and bounces once, than comes back again, and again, and consolidates right above or on the level.
- Conventional wisdom say that the more times a level is tested the more valid it is.
Four Basic Technical Trades
- Support and Resistance break in a trend - Trend Continuation Trade
- Support and Resistance holds in a trend - Trend Termination Trade
- Support and Resistance hold in a range - S/R Holding Trade
- Support and Resistance break in a range - S/R Breakout Trade
Trend Pullbacks
- Earlier in trend bought earlier as people don't want to miss out
- Later in trend bought later as many people are already in
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