Trade Signals for Day to Day Trading
Trade Signals for Day to Day Trading
Fundamental and technical analysts believe that there is a certain rhythm to the markets that careful analysis can help to uncover, providing at least a slight advantage. Day traders in particular, believe in the non efficient market hypothesis and believe they can beat the market which is why they trade short term moves in search of profit. We believe that the market can be predictable to a small degree, enough to help us reduce risk and increase reward in our favour.
Fundamental analysis focuses on news events and the overall state of economies, taking in to account economic indicators and forecasts which are released on a daily basis. Traders may also consider the health of individual companies and sectors to help them decide what news and events will dominate the market at any particular time and form a basis for their strategy to make a profit.
Technical analysts believe we can spot trends and patterns from historical data that provide lower risk entry and exit levels on a trade. My belief is that market price is determined by the interaction of supply and demand both rational and irrational. Technical analysts know that financial markets tend to move in trends that persist for an appreciable length of time and therefore if the trend can be spotted at an early stage using the appropriate tools an edge can be gained and a trade can be held until the trend is deemed to have ended. Many of these trends will repeat over time in a rather consistent manner.
We believe that changes in a trend are caused by the shifts in supply and demand and that is does not matter why they occur, only that they do occur and that they can be detected sooner or later using charting techniques.
Technical Analysis therefore is a useful tool in the forecasting of future price of financial markets, based on historical price movements. Like weather forecasting, technical analysis is not perfect and will not produce 100% certainty about where the market is going or in what time period, but it can help traders anticipate what is "likely" to happen in the future using a variety of charts that show price over time.
Technical Analysis was established when the system of pricing goods on the open market first began in Japan as early as 18th century. However, most of its methods as we know them today were created in the first decades of 20th century and have been used by an increasing number of professional traders, including those at major banks and funds who regularly publish the findings of their analysis for the benefit of their clients.
Technical analysts, sometimes also called chartists, believe we can gain a clearer idea of the current "psychology" of the market through historical price action displayed on charts. Patterns on these charts can indicate the flow of demand and supply and which side will likely prevail and we believe that these patterns will repeat themselves in future price action.
The field of technical analysis is based on three assumptions:
1.The market discounts everything.
2. Price moves in trends.
3. History tends to repeat itself.
1. The Market Discounts Everything
Technical analysis does not require constant monitoring of fundamental information as it only considers price movement. This is because it is assumed that, at any given time, the price of an instrument already reflects everything that has happened or could affect the outlook, including fundamental factors. For example we believe that a company's fundamentals, along with broader economic factors and market psychology, are all priced into the stock by participants, removing the need to actually consider these factors separately. That's why we only need to monitor price movement and volume traded, which technical theory views as a product of the supply and demand of a stock or financial instrument.
Fundamental analysis would try to estimate a company's intrinsic value to determine whether it's stock was a good or a poor investment. A technical analyst is not concerned with value in the same way but the likely future price movement its shares instead and does not care for the fundamental reasons why this happens.
Moreover, technical analysis can be applied practically to every financial market (equities, bonds, commodity futures, currencies, etc) without having to trawl through pages of economic or company reports. Only a charting package providing historical data for the required instrument or stock is necessary and these are very affordable and accessible to anyone with a PC.
2. Price Moves in Trends
One of the first things a technical analyst will try to spot is the trend of the market because after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies and many algorithmic black box systems are based on this assumption.
It is often assumed that prices either trend upwards or downwards but prices also can spend a lot of time in a 'sideways' trend or moving with in a range. Many traders simply look for markets that are trading within a range and wait to enter and exit the market at either ends of the range.
However, there are more often then not, several trends which can be more clearly seen over different time periods. For example, in a monthly chart we can find a long-term trend, which actually consists of many smaller trends. We can then observe the weekly, daily and intraday chart which may be 4, 2, 1 hour or less. It is possible that different time periods will have contrasting trends. Trading in the direction of the trend means you start by determining direction of the long-term trend and then gradually move to lower time frames, but the key trend to watch should be the one corresponding to the time horizon in which you want to have the position open.
3. History Tends To Repeat Itself
The repetitive nature of price movements is attributed to patterns in human psychology that do not change as market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.
There are many different types of approaches to technical trading and the most commonly used methods can be divided into two sections
1. Pure chart analysis where we try to find recognised patterns that occur repeatedly. For example, 'head and shoulders' or 'double bottoms' are considered typical chart patterns and ones that can work well to give a trader an edge offering a low risk trading opportunity based on the direction the price should follow based on the type of the pattern.
2. Technical indicators and oscillators such as Relative Strength Index (RSI), Moving Averages and Stochastic Oscillator which can sometimes give an indication of the underlying strength or weakness in the market. Most traders use some combination of the two.