Especially for short-term trading, technical analysis remains the main pillar for efficient decision-making. Although stock markets began the second half with mixed technicals, that did not prevent new gains from showing up.
Still, new traders in the market are joining the industry and they need to understand some of the basic technical analysis principles. In combination with fundamental and sentiment analysis, that could result in a rules-based approach. Let’s see what retail traders need to master during the early stages of investing.
Trending Markets
Trading involves taking advantage of price movements. Traders need volatility to succeed in the market and also, established trends, so they can buy low and sell high, or sell high to later buy low. A trending market must meet several important conditions, such as:
– The price needs to have a clear directional bias
– Either buyers or sellers need to be in control
– Corrective moves are generally mild as compared to impulsive moves.
It is possible to expand the list by adding new variables, but if these requirements are met, traders will be dealing with a trending market. Although professionals get involved even when prices are trapped in a range or very choppy, beginners should consider only assets that have a clear direction. That way, they will avoid uncertain conditions and not get hijacked by emotional reactions when the price trades violently on both sides.
Indicators
After opening a trading account with a reliable broker, traders will need to download MT4 or any other trading software available. That will be the main gateway to the markets, facilitating trade placements and price analysis.
To conduct those tasks, traders can use a variety of indicators. Moving averages are some of the most popular in the market, representing the average of the closing or opening price for a pre-set period. Although the market might be trending most of the time, it is important to consider prices don’t move in a straight line. Pullbacks to the moving averages will often occur and that is why professional traders are monitoring these lines on the charts.
Oscillators like MACD, Relative Strength Index (RSI), or Stochastic are considered leading indicators, signaling oversold or overbought conditions in the market. Traders use them to anticipate turning points and preserve returns, as much as possible.
The Core Principle Behind Technical Analysis
There is a broad debate around technical analysis especially now when stock markets are decoupled from fundamentals. Recently, US stocks rose despite a big miss on GDP and that makes traders rely more on technical developments. The core principle behind technical analysis is that “history tends to repeat itself”.
The resemblance might not be 100%, but a trader spending many hours in front of the charts will notice many patterns. After that, he can develop rules to place stock trades, manage them successfully, and constantly do that as the markets unfold. Technical analysis continues to be a reliable tool at a time of great uncertainty and until fundamentals will be in sync with valuations, this will be the main denominator for stock market traders.