Trade Craft

Moving Averages

Moving averages are a very simple, but effective, type of indicator plotted on a chart. A moving average smoothens the fluctuations of a stocks prices and helps identify the trend of a stock. A simple moving average is calculated by adding up all the closing prices of a time period and then dividing it by the same time period and you will get a single data point. If you keep following this process a line will develop on your chart. The exponential moving average is a moving average that places a greater weight and significance on the most recent data points. The most common used moving averages are the 200, 50, and 20 day: the 200 day is typically used for yearly entries or exits, the 50 day is mostly used for monthly positions, and the 20 day is used for more short term weekly trades.

Trend Lines

Trend line is drawn under low to high pivot points to show a stocks trend, the direction of price. Trend lines can be used in a number of ways and are the building blocks of technical analysis. According to the billionaire hedge fun manager Paul Tudor Jones "the market only trends 15%-25% of the time”. Trend lines can help identify those short pockets of opportunity. Trend lines can also identify potential break outs and squeeze on a stock. Many technical analysis studies are based off the simple trend line.

Ascending Triangle

One example of a technical analysis study based off trend lines is the Ascending triangle. The study is drawn with a trendline connecting the bottom of the bullish trend to local resistance, which then you will notice a triangle, hence the name. This is viewed as a bullish indicator as the ascending triangle illistrates a change in market sentiment from bearish to bullish.

Supports and Resistances

My most used and favorite technical analysis study, and the most simple, are supports and resistances. In simple words a support is a price where buyers usually buy and respect the price. Resistances are places where sellers take control of the price and usually sell, but as J.C. Parets of All Star Charts says, “The more a stock tests a support or resistances the higher chance it will break it.” Reffering to the cart bellow, you will notice the stock is in a channel between $24.98 and $31.19. Once a resistance point is broken, in this case $31.19, it becomes support and vice versa for resistance.

Fibonacci

One of my favorite technical analysis study is the Fibonacci retracement. Before I can explain the value Fibonacci brings to technical analysis I must explain the history behind the Fibonacci sequence. The Fibonacci sequence was first discovered by an Indian mathematicians about 1,300 years ago and was introduced to the west by Leonardo of Pisa (AKA Fibonacci). Fibonacci came to the sequence after wanting to know how many bunnies would reproduce in a single contained area. He came to the conclusion that 2 bunnies would reproduce and would make a total of 3 bunnies and then those would reproduce and make a total of five and so on. The actual sequences, which may sound familiar, is 1, 1, 2, 3, 5, 8, 13, 21, 34, and so on. Now here comes the interesting part, these numbers are found everywhere in nature. If you cut an apple in half you will find 5 sections. No matter matter the flower it will commonly have either 3, 5, 18, or 21 petals, and lastly rows of seeds in sunflowers and pine cones always add up to Fibonacci numbers. The Fibonacci sequence is nature’s code. Here comes the trading part. Fibonacci retracement levels are in the form of the sequence. These levels are either supports or resistances where prices either stop or rebound. A Fibonacci retracement is drawn from the swing low (the lowest point of price) to the swing high (the highest point of the price). The retracement shows all Fibonacci levels which are, 0%, 23.6%, 38.30%, 50%, 61.8%, 76.4%, and lastly 100%. The most popular levels are 38.2%, 50%, and 61.8%. The Fibonacci retracement not only works so well because it is natures code but also because many traders respect these key levels and it acts like a self-fulfilling prophecy.

Standard Error Channel

A standard error channel allows a trader to determine potential reversals or consolidation of a trend on a chart. The channel is calculated by plotting two parallel lines above and below the mean based on a deviation calculated by price fluctuation. A standard error channel is great for identifying price trends but also micro corrections in an overall trend.

Candle Sticks

The most important part of technical analysis is arguably candle sticks, which display the price action of a stock and takes the most space of your chart. The candle stick chart originated in the 18th century from Japanese rice merchants and traders to track the rice market. Candles sticks are strait forward and provide a lot of information in one candle. Looking at the image attached a single candle stick has a high, the close, the body, the open, and the low. Most of the time the high and low are called the wick. When the body of the candle is red prices have closed downwards. When the body of a candle is green signifies prices have closed upwards. Therefore a series of green candles represent a bullish trend and a series of red candles represent a bearish trend. All these parts create the overall candle stick.