Technical analysis
Technical analysis is not very popular with the average investors. There are many people in the investment world that will tell you that technical analysis is arbitrary. There are rumors out there that studies were done on a group of kids. These kids were told to randomly click on buy and sell buttons of random stocks, and outperformed the technical analysts.
I don't know how the experiment was conducted and if the stories are even true, but to be frank I don't really believe in them. I will show you what have worked for me, and you can decide for yourself. Any successful investor that I have heard of knows how to at least read a chart. They aren't clicking random buttons clueless about the financial market, they are making educated bets. If these kids are randomly clicking buttons they are most likely going to perform as well as the major indexes. But, if you told me that these kids outperformed the average investor, I would have believed you. The main reason most investors lose money is because of their emotions. The average investor chase gains and run away from drops.
Indicators aren't magic, they are mere tools. They take data points on the chart and display it on a different metric. Think about this. When meteorologists try to predict the weather, they will take several measurements such as the humidity, temperature, and pressure. They compare the stats to historic data to give you the likely occurrence of rain or a thunderstorm. Technical analysis is very similar to this.
You have to keep the indicators few and simple. It doesn't make any sense to have too many indicators, and you will just end up feeling confused. Try not to get too caught too caught up in it. If you decide that technical analysis is really not for you, you need to at least know when things are in a bull or a bear market, and spot breakout patterns.
I don't know how the experiment was conducted and if the stories are even true, but to be frank I don't really believe in them. I will show you what have worked for me, and you can decide for yourself. Any successful investor that I have heard of knows how to at least read a chart. They aren't clicking random buttons clueless about the financial market, they are making educated bets. If these kids are randomly clicking buttons they are most likely going to perform as well as the major indexes. But, if you told me that these kids outperformed the average investor, I would have believed you. The main reason most investors lose money is because of their emotions. The average investor chase gains and run away from drops.
Indicators aren't magic, they are mere tools. They take data points on the chart and display it on a different metric. Think about this. When meteorologists try to predict the weather, they will take several measurements such as the humidity, temperature, and pressure. They compare the stats to historic data to give you the likely occurrence of rain or a thunderstorm. Technical analysis is very similar to this.
You have to keep the indicators few and simple. It doesn't make any sense to have too many indicators, and you will just end up feeling confused. Try not to get too caught too caught up in it. If you decide that technical analysis is really not for you, you need to at least know when things are in a bull or a bear market, and spot breakout patterns.
Breakout pattern
I want you to look through the slide show below and see the common characteristics of break out patterns. Right before a breakout you will see a tightening and a compression in the price action. The stock trade side ways in a range for a period of time before breaking out of a triangle, trend lines or major resistance. It doesn't always have to be on the upside. It can be on the downside. Look at the second picture for an illustration of a break down. The third picture shows a fake out where the initial move was to the upside and fooled many traders. This is when stop losses come in handy. In this case, shortly after entering a trade you should have put the stop loss a few cents under the break out point. The second move is a clear break down in price out of the compressing triangle.
It is very clear in these chart patterns that after the initial breakout in any direction the prices comes back to test the point that the price have broken out. Occasionally the price retest fails and the price move in the opposite direction of the break out. Therefore it is better to wait for the retest rather than chase the initial breakout. If the retest succeeds and move back in the initial direction of the breakout with increasing volume in the price direction, that is your best confirmation. This is the optimal buy point or sell point. Not all breakouts will retest. In that case, enter on pull backs.
It is very clear in these chart patterns that after the initial breakout in any direction the prices comes back to test the point that the price have broken out. Occasionally the price retest fails and the price move in the opposite direction of the break out. Therefore it is better to wait for the retest rather than chase the initial breakout. If the retest succeeds and move back in the initial direction of the breakout with increasing volume in the price direction, that is your best confirmation. This is the optimal buy point or sell point. Not all breakouts will retest. In that case, enter on pull backs.