Stock Trading Online - - Technical Analysis Explained

Stock Trading Online - - Technical Analysis Explained

An Internet search for "technical analysis" reveals that there is an enormous amount of information to sort through. Trend lines, moving averages, support and resistance, volume, momentum, stochastics, relative strength, Bollinger Bands, rate of change, standard deviation, accumulation-distribution, advance-decline line, Japanese candlesticks… and the list goes on and on.

Trying to understand all of this can discourage beginning traders who are eager to get started and put some money on the table. Even experienced traders who know the value of technical analysis have found that a huge amount of work and discipline is required to use it real-time and they often to give in to the temptation to substitute less reliable methods.

Don't worry, we've found a way to cut through the information glut and provide you with exactly what you need to trade successfully, regardless of whether you want short-term hit and run profits or powerful long-term investing strategies.

But before we show you the absolute best ways to profit from this misunderstood technology, lets take a peek into our history books to find out where it all began.

The history of technical analysis. The very first chartists in the United States appeared at the turn of the century. They included Charles Dow, the author of the famous stock market theory, and William Hamilton who succeeded Dow as the editor of the Wall Street Journal. After the famous stock market "crash" of 1929, Hamilton advocated the use of charting in an editorial entitled "The Turn of The Tide" and then proceeded to lay out the principles of Dow's stock market theory in a book titled The Stock Market Barometer.

The decade of the 1930's was the Golden Age of charting. Many innovative researchers published their work during that period including Richard D. Wyckoff, a trader who started in 1888 as a 15-year-old stock runner, W.D. Gann who began his career as a stock broker In 1906, and R.N.Elliott, widely known for the "Elliott Wave Theory" . Their work went into two distinct directions. Researchers such as Wyckoff saw charts as a graphic record of market supply and demand, while others including Gann and Elliott searched for a perfect order in the markets. In 1948, Edwards and McGee published a book called Technical Analysis of Stock Trends. They popularized the use of chart formations such as triangles, rectangles, head and shoulders, as well as support, resistance and trendlines.

Things have changed a great deal since then. In the 40s, daily volume of an active stock on the NYSE was only several hundred shares. Today it's not uncommon to see an active stock trade tens of millions of shares each day. Bears were firmly in control of the stock market In the "good old days", but as years passed, the balance of power shifted and is now in favor of the bulls. Early technical analysts noted that stock market tops were sharp and fast, while bottoms took a long time to develop. That was true in the de-flationary era of the 30s and 40s, but the opposite has been true since the 50s. Now bottoms tend to form quickly while tops tend to take longer.

The beginnings of technical analysis go back much further than the early nineteen hundreds. Japanese rice traders began using candlestick charts some two centuries before the first chartists appeared in America. Before you envision dripping wax and flaming wicks, the term candlestick was adopted because of the similar appearance between candles and the symbols used to represent price which were drawn on each chart. The Japanese focus is on the relationship between opening and closing prices and on patterns that include several candles. They consider highs and lows relatively unimportant. Unfortunately, most candlestick chartist's fail to use many tools of Western analysts. They ignore volume and have no trend lines or technical indicators. This now appears to be changing as modern analysts combine Western technical indictors with classical candlestick patterns. A classic case of East meets West.

OK, that's enough history for now. Let's take a look at two subjects which help determine the success or failure of technical analysis in action: Science and Art.

"It would be possible to describe everything scientifically, but it would make no sense; it would be without meaning, as if you described a Beethoven symphony as a variation of wave pressure."

---- Albert Einstein

Is it Science or Art? It may come as a surprise to find that Technical Analysis combines the dual categories of science and art. Although the subjects appear to be at opposite ends of the spectrum, joining them together creates a dual perspective that provides remarkable market insight. The resulting combination can be compared to night-vision goggles that give you just enough of an edge to stay ahead of the curve, shifting the odds of winning dramatically in your favor.

Science 101

The scientific aspect of technical analysis (TA) presents itself in many forms. There are literally dozens of separate indicators and unlimited ways of applying them. A tremendous amount of research has been necessary over the years to develop each component and then even more research to determine effectiveness and reliability. Studies have shown that the wide array of technical indicators and methods exhibit different degrees of success depending on how, when and under what conditions they are applied. Sound difficult? It sure is. But it's our job to make it look easy, so leave the driving to us.

Art: So what is it, a Picasso or Rembrandt?

The artistic qualities of TA become obvious the instant you look at a visual display on a computer screen. Colorful charts graphically reveal elements of TA as different indicators are painted in patterns and lines. Talk about abstract art ! One look and you feel like it should be hanging in a metropolitan art museum. Less obvious than the graphic display but just as important is the impact of artistic interpretation. OK, so how should we interpret this painting? Realize that everything showing on the screen was put there by the chartist. Although the price bars are determined by actual stock prices, the placement of each line, the number of bars included in each moving average and the technical indicators used depends on the preference of the individual. And it looks so nice! But no matter how pretty the picture, it is far more important that the final choice of technicals tools and patterns can be used to produce profits.

So it turns out that Technical Analysis is a hybrid of art and science that has evolved over the centuries. Due to the complex choices that have to be made, many newcomers will never recognize the tremendous value of TA and just as many will be shaken out of the game. For those who desire a long-term relationship with the markets, the time and energy spent to learn how to use this powerful technology will be well rewarded.