When one considers effective tools to analyzes the performance of a stock, they usually begin with fundamental analysis and technical analysis.
Fundamental Analysis looks at a share's market price in light of the company's underlying business proposition and financial situation.
It is a method of anticipating future price movement using supply and demand information.
While Technical Analysis is a method of predicting future stock price movements based on observation of historical stock price movements.
It is analysis based on market action through chart study, moving averages, volume, open interest, formations and other technical indicators.
The Fundamentalist studies the causes of market movement, whereas the Technician studies the effects.
I will leave the argument over which form of analysis is better to the purists; however, I would like to take some time and look at the most overlooked facet of technical analysis.
There is a world of analysis with technical analysis that most traders never learn.
What is this hidden form of technical analysis? Hidden behind all of the technical indicators or classic chart patterns.
Strip away all of these forms of technical analysis and what are you left with? Price Action! Judy MacKeigan states in her article, "Price Action - The Footprint of Money," that understanding price action enables a trader to minimize questionable entries and improve exits.
Have you heard the following phrases:
Yet, experienced traders can delve deeper to see how price is really moving.
This can allow him/her to see the internal strength or weakness of the perceived trend.
Digging deeper can provide a trader with insight into the possible fear, doubt or greed of the stock's participants that created the price action.
To improve you edge, consider asking the following questions:
You know that I believe in the importance of trade plans to eliminate emotions from your trading.
However, most traders do not take this important step to creating a trade plan and do in fact trade off of emotions.
Consider the psychology of traders who are currently fighting the current move of a stock.
Are they fighting over each and every tick.
Have the created alters to the Stock Market Gods for blessings.
Where are these traders trying to exit their positions.
At what point will fear become so great that they will ultimately exit their positions.
What about the traders who are currently sitting on the sidelines.
They have missed out on the initial start of the move.
Although the professional trader will be using rules/criteria (yes trade plans) to establish low-risk entries into the traders.
The mast majority of traders are novices that are kicking themselves for missing out on the big move.
They are anxiously waiting for a place to join in on the fun.
Where is that fun point of entry? I've heard it once said that you should learn the heartbeat of a stock.
This means devoting time to understanding the movements and price action.
Trading using price and volume or any other form of technical analysis is an art, not a science.
However if you learn how to trade the market using price action, you will increase your edge because all other technical indicators are based of the price.
There is an important implication on this definition of technical indicators.
The fact that the readings obtained from them are based on price action.
Trading decisions based on technical indicators without taking price action into consideration will give us less accurate results.
Fundamental Analysis looks at a share's market price in light of the company's underlying business proposition and financial situation.
It is a method of anticipating future price movement using supply and demand information.
While Technical Analysis is a method of predicting future stock price movements based on observation of historical stock price movements.
It is analysis based on market action through chart study, moving averages, volume, open interest, formations and other technical indicators.
The Fundamentalist studies the causes of market movement, whereas the Technician studies the effects.
I will leave the argument over which form of analysis is better to the purists; however, I would like to take some time and look at the most overlooked facet of technical analysis.
There is a world of analysis with technical analysis that most traders never learn.
What is this hidden form of technical analysis? Hidden behind all of the technical indicators or classic chart patterns.
Strip away all of these forms of technical analysis and what are you left with? Price Action! Judy MacKeigan states in her article, "Price Action - The Footprint of Money," that understanding price action enables a trader to minimize questionable entries and improve exits.
Have you heard the following phrases:
- The stock is in an uptrend/downtrend
- There's a head and shoulder's pattern
- The stock is above the 50 exponential moving average
- The stock established a higher high / lower low
Yet, experienced traders can delve deeper to see how price is really moving.
This can allow him/her to see the internal strength or weakness of the perceived trend.
Digging deeper can provide a trader with insight into the possible fear, doubt or greed of the stock's participants that created the price action.
To improve you edge, consider asking the following questions:
- What is the volatility of the underlying stock?
- Is the momentum increasing or decreasing?
- Is the current move of the stock stronger or weaker than the previous swing?
- Is the current volume above or below normal?
- How does a trader who is long/short of this stock at this price feel?
- Where are there stops (support and resistance)?
- How might the stock react if it moves beyond these points?
You know that I believe in the importance of trade plans to eliminate emotions from your trading.
However, most traders do not take this important step to creating a trade plan and do in fact trade off of emotions.
Consider the psychology of traders who are currently fighting the current move of a stock.
Are they fighting over each and every tick.
Have the created alters to the Stock Market Gods for blessings.
Where are these traders trying to exit their positions.
At what point will fear become so great that they will ultimately exit their positions.
What about the traders who are currently sitting on the sidelines.
They have missed out on the initial start of the move.
Although the professional trader will be using rules/criteria (yes trade plans) to establish low-risk entries into the traders.
The mast majority of traders are novices that are kicking themselves for missing out on the big move.
They are anxiously waiting for a place to join in on the fun.
Where is that fun point of entry? I've heard it once said that you should learn the heartbeat of a stock.
This means devoting time to understanding the movements and price action.
Trading using price and volume or any other form of technical analysis is an art, not a science.
However if you learn how to trade the market using price action, you will increase your edge because all other technical indicators are based of the price.
There is an important implication on this definition of technical indicators.
The fact that the readings obtained from them are based on price action.
Trading decisions based on technical indicators without taking price action into consideration will give us less accurate results.
SHARE
