In an effort to keep their clients comfortable with the trading system they are using, many stockbrokers now include Trading Strategies in their overall trading package. However, what is it that is actually available? Some may confuse strategies with trading indicators such as MACD, Stochastics, RSI and so on.
Most novice traders, most especially those that are new to trading, often fall prey to the following trap – just sticking to the crowd. These professionals, in an attempt to impress their customers, try to include some basic Trading Strategy indicators in their system. This does not mean that you should throw away your trading system, because after all it is an investment tool.
Technical Indicators, in general, fit neatly into five main categories – mean reversion, trend line reversal, relative strength index, volume and time frame based indicators. Most novice traders simply follow the crowd when developing their first trading systems, putting all of their hopes and dreams behind a single stock indicator. What they do not realize is that most trading indicators are not meant to be relied upon for long term investing decisions. There are more reliable tools out there.
Trend lines, in particular, are only helpful if a trader can use price action to find the correct entry or exit points. Price action, however, is a very difficult concept to master. If you don’t fully understand the relationship between price movement and trading signals, it becomes very difficult to make good buying and selling decisions. You have to learn how to read a stock chart in order to develop good trading strategies. Unfortunately, a lot of beginner traders do not take the time to learn these skills.
For example, the best Technical Indicators for price action is moving averages. They are the best way to find support and resistance levels. Price action is the most reliable indicator for finding trend reversals. Using moving averages allows us to see past trends clearly, without having to wait for future charts to come out to find them.
Some strategies even look at the time frame based indicators. The idea here is to find the trend that has the highest average price movement over the last three months. You can then analyze the price action of this type of indicator and decide whether or not this is a good time to invest or to sell.
Finally, there are other types of Trading Indicators that are based on the idea of volume. This includes MACD and Stochastics. The goal here is to find the highest and lowest average price movement over a given time frame. Again, these indicators are the most difficult to interpret and are better left to professionals.
No matter which Trading Strategy you decide to use, be sure to discuss these points with your broker. Many times, a professional broker can help you develop a strategy that works well for your particular situation.
Trading strategies must be carefully designed to meet your particular goals. For example, the most important factors to consider when developing a technical analysis of the market is to determine if you want to be a long term investor or a short term investor. Long term investors buy and sell stocks when the price goes up. Short term investors generally purchase stock just as they are.
If you intend to be a long term investor, then the first thing you should examine is the time frame of each day. Find the days when price action moves above or below the trend line. The next thing you should look for are support and resistance levels. Find the lows and highs. If there are any areas of support or resistance, then you should either stay away from the stock or buy and sell at higher prices.
The next thing you need to do is identify the trend line using the price chart. The trend line should break below or above the trend line at the lowest resistance or support levels. If the trend line breaks below this line, then you should exit the stock at lower prices. On the flip side, if the trend line breaks above the trend line, then you should enter the stock at higher prices. If it breaks above the trend line, then you should exit the stock at lower prices.
Finally, when analyzing the market by looking at the high and low point of a stock chart, you should analyze whether or not you want to buy or sell based on the direction of the trend line. If the high point is lower than the low point, then you should enter the stock at a loss, while a high point above the low point is better. If the high point is higher than the low point, then you should exit the stock at a profit.