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Why Charting - Prices are the reflection of trading mechanism
not the measurement of value in short term. Charting is to study the dynamic of market
forces. Many participants do not conform to the fundamental study of the underlying value.
Especially the speculative motive will cause the securities become over value or under
value.
Interaction of these forces normally form certain pattern and rhythm. Technical analysis
focus on the intention of market participants which exhibit as the market sentiment. |
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There are many techniques used in Technical Analysis. Two basis
categories are
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| a |
Pattern Recognition |
| b |
Mathematical Indicators |
Pattern recognition are very subjective and not
standardized.
| Most commonly use Indicators are: |
| 1 |
Moving Averages |
| 2 |
Moving Average Convergence Divergence |
| 3 |
Stochastic |
| 4 |
Directional index |
- Moving Averages
Moving Averages are the simplest indictors which average the closing price of the several
market days, the purpose is to smoothen our the jigsaw movement and gain the insight of
the general direction. The longer the period for the average the slower it will reflect
the change of direction.
- Moving Averages Convergence Divergence.
MACD is the measuring of two moving averages, when a fast moving average is above the slow
moving average, MACD will reflect the positive value, which indicates an up trend. When a
fast moving average is below the slow moving average, MACD will be negative and indicating
a down trend.
- Stochastic is a sensitive indicator reacts
quickly to the changes of direction, which is only suitable when market is trading within
narrow range. In a trending market stochastic will be over sensitive, react too strongly
for a small correction and overlook the main direction.
- Directional Index.
Index measuring the buying power (D+) and selling Power (D-). The absolute difference
between the D+ & D- is the directional Index. The Index measure the trendiness of the
market.
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There are two major school of thought in technical analysis -
- To predict the future Price Movement and to forecast the target.
- To extrapolate the current direction and to monitor the change of
direction.
Inability to produce a reliable forecasting result has lead to the
monitoring approach. Basically, monitoring approach use lag indicators mentioned in
earlier section such as MACD to provide a trend following technique without a preset
target. Integrating the MACD and Directional index provides the traders with the sense of
directional trendiness.
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Our traditional wisdom told us to buy low, sell high. When the
market is congested and the relative level has been established, we can conveniently using
this technique, but when the market broke out of recent range and show the direction, the
level play may not be appropriate. Trend follow technique should be used in this
environment.. Directional Index can be used to indicate the
trendiness of market. When the ADX is higher than 25, the market direction will continue
until ADX become lower.
Phrase of market cycle.
Trend following technique is a widely accepted method when prices rally for prolonged
period. But the rally will come to a abrupt end when it was least expected not matter how
long the rally can sustain. Profit taking will set in within two months, at
least there
will be a breather before market could resumed it rally.
Using the daily chart, each MACD cycle will last from 2 weeks to 2 months.
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To implement the trading technique according to technical analysis, traders are required
to adherence to the plan. Very often, traders are influence by their emotion as market
moving in their favorable / unfavorable direction.
Most traders could not bear to see their profit eroded when the price advance in the
zigzag manner. Regretting not selling at the highest point will refrain them from riding
profit according to the indicator's movement. |
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According to daily chart's cycle, trading horizon should be between 1 week to 2 months.
Therefore certain level of holding power is required to carryout the plan. |
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To enter the market when pull back occur during the rally is not a reliable method because
the pull back can develop a profit taking / correction. Entry should be based on advance
in price upturn in MACD indicator.
When market trapped in tight range, a more sensitive indicator such as stochastic is more
suitable. |
The recommendations are solely based on interpretation of technical indicators. Author is
not responsible for any losses from trading or whatsoever relied on the recommendation. |
