4 Tips To Improve Your Technical Analysis

The entire endeavor of technical analysis rests on the premise that a stock’s price follows predictable patterns that traders can identify and use to generate profit. That’s a simple idea, but when you add layers of indicators and time frames on top of that, it can get complicated quickly.

As a short-term day trader, I need to be able to make snap decisions based on what the chart is showing me. Technical indicators are most useful when they enable you to immediately make a decision, not lead you further down the rabbit hole.

Here are a few lessons I've discussed in my day trading courses. 

Know The Support And Resistance

This is the fundamental aspect of technical analysis. The utility of every indicator is intrinsically linked to price and the repetition of identifiable phases of growth and retraction.

Before adding levels of sophistication to charting these patterns with moving averages and money flow, make a broad observation of how the price has fluctuated and where the levels of resistance and support are. Developing an eye toward identifying basic recurring movements in price will enhance your ability to seeing a trend quickly.

This also led to me trading with cleaner charts and relying more on my eyes.

Widen Your Time Frame

It is easy to get into the habit of myopically scanning the five or 15 minute charts for the action that signals your moment to move on a trade. But identifying longer term trends in a stock’s price is essential to seeing the fundamentals. It allows you to not just how a stock moves, but why.

This is why I typically start my technical analysis with weekly charts, and then work my way down to intraday charts. From there I can identify ideal entry and exit points on my trades.

Don’t Rely Too Much On One Type Of Indicator

There are literally thousands of technical indicators that exist, but they can generally be grouped into a four main categories: volume, momentum, trend, and volatility.

Knowing how each of these types of indicators differ is a little like knowing how the stocks in your long-term portfolio differ. Just like in your portfolio, you want to be diversified in your analysis. Leaning heavily on a volume indicator is ok; leaning heavily on four different volume indicators is not. It would be redundant, and only complicate your trading.

In a similar vein, you should learn which indicators are leading and which are lagging. The difference is some will alert you to a new trend while others will confirm the existence of a trend identified by another indicator.

The Trend Is Your Friend

“The trend is your friend” is a well known trading axiom. And for good reason. In my day trading I've come across many other traders get fixated on an idea, and then be too stubborn to admit their mistake when they have the chance to minimize their losses.

Mind you, I’m not saying to chase every trend your charts show you. But my advice when it comes to fighting a trend is to be very careful, and that goes for if you’re a short-term day trader or a long-term investor.