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How to Apply Technical Analysis to Day Trading

How to Apply Technical Analysis to Day Trading
September 30
23:53 2011

Most day traders use some form of technical analysis of the price action of the market or markets they are watching. The following sections contain a discussion of the ways in which to effectively apply well established technical analysis methods to day trading.

Price Charts Used in Day Trading

The price charts typically used for such intraday technical analysis could display price bars or candlesticks with periodicities of one, five or fifteen minutes up to one hour. These charts can be used to assess the direction of the short term trend, as well as for identifying reliable chart patterns that may provide profitable day trading opportunities.

Some day traders use even shorter term tick charts that display each price movement in the market so that they can better assess up to the minute levels of support and resistance.  Such tick charts are especially popular with scalpers who aim to jump in and out of the market quickly, hoping to capture a few pips or cents of profit each time.

Assessing the Underlying Trends

In addition to an analysis of the short term price action, most day trading technical analysts will also have reviewed longer term charts to assess the medium and longer term trends that are prevailing in the market of interest.

Although some day traders will take positions against the trend to profit from corrections, many prefer only to take positions with a direction that corresponds to that of the underlying trend.  This makes an accurate assessment of the underlying trend an important task of most technical day traders.

Day traders might perform this trend assessment by looking at the daily and weekly bar or candlestick charts to see if they can identify trending chart patterns like channels or trend lines.

Using Indicators in Technical Day Trading

More sophisticated day traders interested in assessing the trend might overlay their short and longer term price charts with key trend indicators like moving averages of various periods where crossovers might signal trading opportunities.

They might also watch out for overbought and oversold markets by reviewing the level of the RSI and avoid buying when the market is overbought or selling when it is oversold.

Day traders might also want to assess the strength of the trend with an indicator like the Average Directional Movement Index or ADX.  In addition, the Moving Average Convergence Divergence or MACD indicator is also a popular day trading indicator that combines trend direction and strength information, as well as providing helpful trading signals.


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Today’s Day Trader Strategy

One of the most common and destructive mistakes a day trader makes is to simply not follow their plans. Temptation, an “obvious signal”, and just simple greed can lead traders down the road of being undisciplined. This is without a doubt one of the most dangerous mistakes, as traders will often lose more than they originally planned as they raised their amount risked.