Technical Analysis is the study and interpretation of price, time, and volume for stocks and indexes. Due to the massive changes to the Stock Market Structure since the Banking Debacle and Sub Prime Mortgage disaster, Technical Analysis has been evolving and changing. There are many aspects of Technical Analysis including Candlestick Patterns, Support and Resistance, Trendline Patterns, Angle of Ascent or Descent, Overall Trend, Up Trend, Down Trend, Sideways Trending, Institutional activity, High Frequency Trader activity, Small Funds and Retail activity, Entry and Exit Signals, and Indicators.
All of this can be simplified down to 5 areas of analysis which makes your stock pick selection faster, easier, and far more reliable. Here is a list of the 5 Key Aspects you need to analyze and interpret when using Technical Analysis:
1. The WHAT of Technical Analysis is what trend and trendline pattern is the stock developing at the time. As an example for this lesson, let’s study the sideways trend. You would need to identify what the sideways pattern is from the following: Trading Range, Platform, Consolidation, Wide Sideways, Bottoming, Topping, or Compression.
2. WHEN does the trend or trendline pattern from the choices above occur or develop in which of the following Market Conditions: Platform Markets, Trading Range Market Conditions, Topping Market Conditions, Long Term Bottoms after a Great Bear Market, Occasionally in Moderately Trending markets when Index component stocks are lagging behind new technology stocks.
The WHEN helps you identify the current Market Condition. This is critical information because the Market Condition present at the time you decide to trade a stock, tells you how much momentum is in the market, how resistance and support will behave, where to place stop losses, how to calculate run gain or target gain potential, and the overall risk of the trade.
3. WHY tells you the reason the stock is moving in that particular trend and trendline pattern. It defines the overall fundamental conditions and economic conditions, that can and do influence technical patterns. Adding fundamental indicators to your analysis will help clarify the institutional interest, and other crucial financial information. Using fundamental indicators in addition to technical indicators, streamlines the decision of which stock of several you should choose to trade.
4. WHO is all about which of the 9 Market Participants create that price action. Trading Range price action is not created by the giant and large institutions that use Dark Pools. Trading Ranges tend to form when several different smaller lots and High Frequency Traders are disagreeing on the direction the stock will take, sentiment is fractured, and neither the buy nor sell side controls price sufficiently to sustain the uptrend or the downtrend.
5. WHERE is the understanding of where you have the greatest potential for an excellent stock trade that will earn high profits with very low risk. WHERE tells you the price level, as well as the entry and exit you should use. WHERE tells you how to trade, what strategies to use, and how long to hold the stock.
With 5 Key Aspects of Technical Analysis, you now have deeper understanding of everything you need to know about the stock before you decide to trade it. This eliminates weaker stock picks, brings clarity to the stock analysis process, and continually reminds you of the overall conditions in which you are trading. WHAT price patterns tell you the overall trend and trendline pattern. WHEN gives you the market condition. WHY tells you why a stock moves that way. WHO controls price will tell you how price will behave in the near term. WHERE tells you the entry price, risk, exit, and the strategy to use.
Source by Martha Stokes, CMT