Understanding Technical Stock Market Analysis

An understand of technical stock market analysis can be a valuable tool in determining the trend of any market and assisting with entry and exit levels for your trades. 

Using technical stock market analysis to determine when a market is trending (and just as importantly, when it is not) is a good way of putting the odds in your favor when you enter the market.

As a general rule, strongly trending markets have small reactions of between 1 and 4 bars on any chart you may be looking at, so we are always trying to enter trends that meet this criteria. 

These bars can be for time periods of a little as one minute for day-traders, up to weekly or even monthly charts for long-term investors.

All it takes is a couple of trends like this a day for day-traders, or a couple of strong trends each year for long-term investors, to make a lot of money trading. 

Unfortunately, many people fight the trend and buy or sell at every small change in direction, thinking they have picked the top or bottom of the market, only to see the trend continue on it's merry way immediately.

By the time the trend is finished, these traders have spent their psychological and monetary capital in a futile attempt to pick the top or bottom.

Another common mistake traders often make is increasing their position size when they are wrong, or averaging a loss (sometimes called dollar cost averaging). 

This can (sometimes) work for long-term investors (but only sometimes), but it can be a very dangerous strategy for traders. It is often advocated by well meaning friends and others when they hear of a loss you are facing  - they justify it by saying things like "You don't lose money until you sell".

Of course we know that this isn't true - a loss is a loss no matter when you take it. Better to take it sooner rather that later or you won't have a trading account left to trade with. This kind of strategy can prove disastrous to a trader, you don't want to go there. 

Remember - The trend is your friend, so don't ever buck it.

The correct use of technical stock market analysis also gives us a mechanical indicator to use for entries and exits, and takes a lot of the guess work out of our trading. It is very hard to argue with the trend being down if you are looking at a series of lower tops and bottoms on your chart.

Will every trade be a winner if your technical analysis skills are good?

Of course not. Losses on some trades are inevitable, as we cannot know for sure what the market will do. 

If you are a day-trader, it only takes one large trader dumping a bunch of orders into the market to invalidate your perfect trade set-up and send the price of anything in the opposite direction to what you were certain was going to happen.

If you are a longer-term investor, it can take more than one big trade to change the trend, but still you are going to have losses when you get it wrong.

All our analysis can do is alert us to probabilities - there are no certainties in financial markets. This is the hardest thing for most traders to accept. We all hate to be 'wrong', but that is the nature of the trading business.

All we can do is take every trade our analysis gives us and see what happens. The better our stock market analysis and our trading system, the more likely our trades will produce profits over the long term. 

So remember, the large profits come from identifying a strongly trending market in whatever time-frame you are trading, and taking multiple positions (limited of course by your trading account size and tolerance for risk) with that trend. You need a system to identify these strongly trending markets and alert you to the potential of a trade.

To get you started on your way to finding that system and understanding how to trade the market of your choice, grab a subscription to our Free 5 day Futures Trading Mastery Course.

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