Technical Analysis (Part 01)

What is Technical Analysis?

Generally stock market analysis falls into two broad categories. i.e. Fundamental Analysis and Technical Analysis. Now we are going to take a look at the Technical Analysis of the stock market. Very simply put, Technical analysis can be identified as the process of analyzing the price movements and volume movements of a stock and predicting the future movements based on the results. This maybe a kind of too 'modest'. ;)

So let us look in depth.  

Technical analysts use charts, graphs, lines, regressions, trade patters etc. to help their Technical analysis. It is fair to say that all of these are done using the historic and real-time data of prices and volumes of a particular stock, and thus justifying the simplified explanation I provided above. Technical analysis includes the study of many tools like 'Relative Strength Index', 'MACD', 'Average Directional Index', 'Commodity Channel Index' and many more.

Before jumping into the advanced areas of Technical analysis, there are a few concepts a technical analyst must know.

Important Concepts associated with Technical Analysis

• Resistance - a level of price that stops/prevents the price from moving beyond that point. It may act as a 'Price Ceiling'. This is not permanent however. 
• Support - a level of price that stops/prevents the price from moving/dropping below that point. This acts as a 'Price Floor'. This too is not permanent. 

(Both Resistance and Support could be broken and when that happens a significant price increase or decrease can be witnessed.)

• Trend Line - a line drawn connecting two price points. 

• Channel - a pair of parallel trend lines
• Moving average - a line depicting the average price movement of a stock over a period of time. Also known as MACD.

• Relative Strength Index (RSI) - used to chart or map the relative strength and weakness of a stock.
• Bollinger Bands - measures the highness or lowness of the price in relation to previous price trends.

Those are still a few concepts that are used in Technical analysis. Seems extremely difficult? Well, Yes and No. If you study each tool carefully and gain experience by using them first hand, it becomes as easy as everyday trading. The part 01 of the Technical analysis article will stop fro now. The second part will be coming soon with more about the Technical Analysis to win the stock market battle.

Swing Trading

What is 'Swing Trading'?

Swing Trading is yet another type of stock trading where a trader will attempt to make several trades within 'one to four' days following the price fluctuations of a stock within the period. Unlike Day Traders who hold the stock for a maximum of one day, Swing traders may actually hold a stock for a small period of time, generally one to four or five days. This is a breed of traders between Day Traders and Investors. :)

That being said, we'll look what kind of technique Swing Trading involves. 

Generally, Swing Traders watch the market closely to determine the absolute perfect entry and exit prices. This is very vital for a Swing Trader since he does not wish to hold the stock more than a few days, so he has to know the profit maximizing in and out prices. Yes! This is relevant for all types of trading. But investing, which is long term, does not necessarily require an absolute perfect entry price. An investor will anyway be holding the stock for a minimum of say one year, that is an absolutely enough time period for a stock to improve despite market conditions, demand and supply etc. So it is pretty clear that Swing Traders require pin-point knowledge on market behavior. 

Another feature of a Swing Trader is that he is a more of a technical analyzer than a fundamental analyzer. Technical analyzing is about examining and reading the stock market charts, trend lines, price symbols, graphs etc. Fundamental analysis looks at the performance related information of the company. For a stock to reflect the performance of it's company, it might take some time, a resource Swing Traders don't have. Technical analysis is more real-time. We can literally watch the price lines move up and down every minute. These information provide enough knowledge for a Swing Trader to act. This requires some real guts. Fundamental analysis is a promising road, but takes time. Technical analysis is risky and equally rewarding. After-all it's all about high risk-high reward for a Swing Trader.

The right stock

A Swing Trader will have to pick a 'good' stock to do the swing trading. It is the accepted norm that the relevant company should have a large market-capitalization. Also it is very important that the price fluctuates constantly. The range of fluctuation doesn't really matter, but more-the-better. Because that will allow the Swing Trader to enter at the minimum price and exit at the highest price. 

Examine the above picture. This is an intra-day price chart of a stock. For an experienced Swing Trader this stock would've earned him a fortune. The BLUE arrows show the price increases. The ORANGE arrows show the price drops. The BLUE lines show the minimum price level and BLACK lines show the maximum price levels. This is a price chart, that's why swing traders use technical analysis rather than fundamental analysis. Within one day this stock has gone up and down 5 times. These are the kind of stocks a Day Trader would be eyeing too.

The right market

To be boldly honest either kind of market is not perfectly ideal for Swing Trading. Whether it's a sleeping bear market or raging bull market, it really doesn't matter for a Swing Trader. All that matters for him is the price fluctuations of a said stock. Any market that goes up and down would be ideal for a Swing Trader.   

So;

We have come to the end of the article. It is often said that Swing Trading is the best approach for a novice or a new trader. That might be actually true if you learn to identify the price movements, only limitation with Swing Trading is that a trader has to actually keep staring at the screen for subtle price movements. That is pretty insignificant compared to the gain you are about to receive through Swing Trading. 

Sources : Wiki

                   Investopedia