Introduction to Technical Analysis and Strategic Stock Trading

Technical analysis is a method that has been in existence for several centuries, which involves studying historical price movements to predict future price fluctuations.

Introduction to Technical Analysis and Strategic Stock Trading

Our primary resource throughout this course will be, including its Chart School. For hands-on practice and application of the course material, we will utilize the Globe website.

It is critical to document your trading activity during this course in a journal. Aim to capture around 30 instances.

Understanding Technical Analysis

Technical analysis is a method that has been in existence for several centuries, which involves studying historical price movements to predict future price fluctuations. The main tool is a stock chart, which represents the historic price movement. Based on this historical price movement, along with various indicators (moving average, trading volume, and more), we try to forecast or assign probability to the future trend of the asset.

Technical analysis applies to any type of publicly traded asset, as long as it is traded on an active and legitimate exchange. It is suitable for any time frame from long-term to intraday.

Market Efficiency

One of the implications of market efficiency is that no one has information not already accounted for in the market, thus, profitable trading is impossible. In principle and over the long term, the market is fairly efficient; however, in the short term and under certain circumstances, the market is not always efficient.

The Economic Method

The basis for the economic method is derived from analyzing financial statements. The amount of information required for an economic analysis is immense and impractical for assessing the investment value of a particular asset. With technical analysis, arriving at a conclusion is considerably easier. Analysts often fail due to a psychological issue and identification with the companies they are analyzing, reacting late to market events. During the tech crisis, analysts shifted their recommendations from a "strong buy" to other suggestions very late in the game. The human factor can also be problematic due to potential conflicts of interest between the analysts and the banks that are covering the stock and underwriting its securities.

Technical Method vs. Economic Method

Analysts do influence stock behavior. Although the technical method stands on its own, a combination of the two methods can be beneficial.

Components of Technical Analysis:

  1. Identifying the overall trend: ascending, descending, or sideways.
  2. Identifying support and resistance levels:
    a) Support level – a price level that the stock is unlikely to drop below.
    b) Resistance level – a price level where an ascending trend is likely to stop.
  3. Momentum: We want to identify and analyze the momentum of the stock. There are stocks that are rising but are losing the strength of the rise, meaning they are rising but the force of buyers pushing upwards is declining. On the other hand, there are stocks that are rising at an increasing rate, and the aggressiveness of the buyers is only increasing. We want to see beyond the chart and get indicators to know whether the stock is strengthening or expected to drop soon.

Different technical analysts vary in the weight they give to the chart in relation to the indicators.

Overall, what makes a stock rise and fall is supply and demand. On a stock chart, we see the evolution of supply and demand for a specific stock over time. What determines whether I will profit or lose when I buy a stock is whether there will be more people wanting to buy or sell the stock. If I knew in advance that tomorrow there would be a supply of 100 million and demand of 20 million, I would know that tomorrow there are likely to be price drops in the stock. Since I don't have this information, I try to deduce who will dominate: the buyers or the sellers. That's what the technical analyst tries to do.

Three stages in securities trading:

  1. Preparation work that takes place outside trading hours. I want to come to the trading session knowing exactly which stocks I'm looking at, what I'm looking for, and what data I need. This stage involves preparing a watchlist.
  2. The trading stage. During trading, you shouldn't be thinking but executing the plans you've made in advance. You don't analyze; instead, you carry out what you've preplanned. The strategies need to be ones you are confident in and believe in because often, they won't be popular.
  3. Analysis of results, examining what you did during the trading session.
Technical Analysis: Dow Theory, Elliott Wave Theory, and Chart Analysis
In this lesson, we will delve into two major theories that form the bedrock of technical analysis: Dow Theory and Elliott Wave Theory.