As a trader, you must rely on your abilities to make fast and efficient decisions. When you identify the perfect opportunity on a stock you’ve been keeping an eye on for days, you know every second counts and there’s no time to waste, so you need to take precise actions. But how exactly can you make an informed decision about buying or selling a company right away? After all, when you think about it, it can sound impossible to find out more about a company so rapidly. But here’s the thing: you make quick decisions everyday, even if you aren’t aware of it sometimes. By using decision-making strategies and tools, you make complex situations a lot simpler.
When it comes to trading, technical analysis stands out as one of the top strategies to simplify large data amounts in order to make the decision-making process easier. Assuming you already know the basic technical analysis concepts, you may be looking for the best ways to improve your trading with technical analysis. This is precisely what this blog post is about, so keep reading to learn more.
Measure support and resistance properly
Support and resistance are among the most important parts of technical trading. Support areas represent prices where buyers overpower sellers, while resistance areas refer to the opposite, with sellers overpowering buyers. These price levels enable traders to gauge a trade’s risk and reward, but it’s very important to measure them properly.
Also, keep in mind that there are no guarantees that support and resistance levels will hold. Some types of support and resistance levels to be aware of include psychological price points, static price points, trend line touches, and technical indicators.
Understand the trend
The trend of a stock refers to the direction in which the price is heading, and can go flat, upwards, or downwards. Understanding the trend of a stock matters as it gives you confidence that you are moving in the right direction when it comes to a trade. For instance, when a stock is downtrend, it’s not a good idea to initiate a long position unless you notice a trend reversal is indeed possible.
Furthermore, you want to account for time frames, and this is because a stock can have various trends across various time frames, and it’s essential to pay attention to the trends that matter the most for your trading style. For example, let’s say a stock is in a yearlong uptrend, and makes for an exciting investment opportunity. You may find the same stock in a multi-day downtrend, which would translate into a bad long-biased swing trade.
Analyze different timeframes on your charts
When staring at chart patterns for hours, it can feel like you’re operating in a bubble of your own, but it is essential to be conscious of your trading environment. Trading stocks can take different forms, based on the strategy people choose, whether it’s swing trading, day trading, scalping, and so on. For each of these cases, unique analytical tools are needed, which is why it’s imperative to consider the bigger picture. To do this, make sure to analyze charts across several timeframes.
Evaluate hourly charts, intraday charts, daily charts, and so on, as this will help you spot significant price points and give you a better understanding of traders’ mentalities. For instance, $5.30 may not seem like a lot on an intraday chart, but on a daily chart, it can have major significance. So, remember to analyze different charts and try to get an insight into the other traders’ perspectives.
Don’t rely on too many technical indicators
At the beginning of the blog, we mentioned the importance of efficient decision-making, and while technical indicators can undoubtedly contribute to it, if you rely on too many, the process can become inefficient and redundant. Most technical indicators use the same three inputs: price, volume, and time.
Hence, one of your main priorities when using technical indicators is differentiating between the ones that will support your decision-making and the ones that will only hinder it. Moreover, the role of indicators is to enhance your strategy, and not to rationalize decisions you have already made, so if you’re always referencing the VWAP, MACD, or PSAR indicators before making a trade, this is a sign that you’re doing things wrong. So, make sure to limit your indicators, as this will be more helpful.
Balance risk and reward
Traders are often compared to gamblers, and while this isn’t necessarily the case, sometimes, they do act in impulsive ways and disregard risks. Most successful traders have understood the importance of mitigating risk, which is an inherent part of the trading landscape.
As a trader, you want to shift the odds in your favor. If you risk a dollar to make a dollar, you’ll literally get the same odds as you’d get in a casino, while risking a dollar to make four dollars would make things more favorable for you. It’s important to measure risk and reward through support and resistance levels, as this will help you take the right course of action. For example, if a stock trades at $10, and has a resistance level of $15 and support of $9, the best thing to do is place a trade where you risk $1 to make $5. As a rule of thumb, you should focus on looking for stocks with favorable risk/reward ratios ( ideally, above 3:1).
Don’t ignore fundamentals entirely
While this blog post focuses on technical analysis, this doesn’t mean you should completely overlook fundamental analysis. After all, it does have its role in your trading strategy. Understanding fundamentals allows you to gauge a price action’s legitimacy and create a well-rounded trading plan. For instance, if a stock breaks out 50% on the day, it’s wise to first understand the move’s legitimacy before deciding if it is a short or long play.
Suppose the stock breaks out because its earnings estimate doubles; the best way to proceed is to hold off on your short position. On the other hand, when a stock breaks out artificially because of a paid promotion, another approach is recommended.
The bottom line
Technical analysis is by no means a piece of cake, but rather, a skill that can take years to master. While it is impossible to predict the market with 100% certainty, good technical analysis can still make a ton of difference in your trading journey and yield major returns in the long run.