Using Technical Analysis in Day Trading
Category: Technical Analysis
Subcategory: Charting Basics


Using Technical Analysis in Day Trading

Technical analysis studies the day to day movements of the market. It helps to ascertain the kind of market, or market trends, that exist over the short or long period. It’s useful to find out the patterns in particular stock movements. Through technical analysis, one can predict the future of the market one is trading in.

Various technical tools and methods are used to spot entry as well as exit points in different stocks. But, no technical analysis tool by itself will give a perfectly reliable buy or sell signal. Still, these technical indicators can be useful for taking appropriate decisions. A combination of various technical indicators can give a fair idea of future market movements.

ADX, which stands for Average Directional Index, is an important indicator that shows the strength, volatility, and the future of a trend. One can spot strong or weak trends based on the scale of 0 to 100. Readings below 20 indicate a weak trend, and above 40 show a strong one. ADX is used to measure the strength of a trend, not to indicate the direction.

A concept called ‘Bollinger Bands’, which is actually a price band, is commonly used in all markets. It is used to indicate whether the market prices will tend to stay within the upper or the lower band. If prices move outside the Bollinger Band, it suggests a continuation of the current price trend. If one uses Bollinger Bands alongwith the other market indicators, one can spot trends more easily and efficiently.

The moving average convergence indicator, developed by Gerald Appel, compares prices by moving averages. The difference between the moving average, which displays momentum features, is used to predict future movements. Generally, it is more advantageous to rely on a single index for a long period of time. Indicators such as the RSI and Stochastic, which show overbought or oversold, can be used over a long period of time. Some situations demand a study of multiple market indexes.

Day trading demands quick decision-making, and that’s why it’s risky. Technical analysis helps a lot when it comes to choosing stocks for day trading, predicting intra-day trends, and the future outlook. When markets develop strong trends, moving averages or trend following indicators can be used to follow the trend.

The momentum and trends are displayed by the MACD (Moving Average Convergence/Divergence) periodically, which can be used appropriately. If you are a day trader, you must be conversant with various kinds of indexes, ratios, and technical tools that are used to predict future trends of the market.

All kinds of technical analysis tools keep track of day-to-day movements, and establish the indicative patterns among these stocks. They take an overview of the stocks at various times during the day, and accordingly create patterns. These patterns could be the outlines that suggest a future surge or decline.

Whether you are bullish or bearish, you can’t help but have to rely on various technical analysis and trends for your daily trading activities.

When the markets are following a certain trend, you can make your money using technical analysis. But when there is no specific trend in the market, you need to be cautious and look out for any clue that may form a particular pattern in the movements. It’s always better to concentrate on two or three indices and explore them thoroughly. This will provide a better and more systematic interpretation of various market trends. The systematic study of the ups and downs of the market pays rich dividends in the long term.