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  Category: Articles » Finance » Stock Market » Article

Using Technical Analysis in Day Trading

By Linda Wainman

Technical analysis describes different ways of predicting the future of the market you are trading.

Technical analysis helps identifying the type of market that exists, whether it is trending or range bound.

A variety of technical tools are used to help gauge good entry points. No TA tool by itself will give you reliable buy or sell signals. Learning how to read indicators is more of an art than a science.

There is no black box that will give you the perfect, accurate signal. However, the combining of the right group of TA indicators with discipline and adequate trading capital has been the road to fortune for many traders.

An important tool for determining the strength of a trend and whether a market is range bound is the Average Directional Index or ADX.

Measured on a scale between 0 and 100, readings below 20 are used to indicate a weak trend, while readings over 40 indicate a strong trend. ADX is not used to show the direction of a particular trend, rather to measure its strength.

Stay away from trend following trades if the ADX is below 20 and trending downward. Bollinger Bands are a popular study used across all markets.

They can be useful in both generating entry and exit signals and gauging trends. The basic interpretation of Bollinger Bands is that market prices will tend to stay within the upper and lower bands.

If price moves outside the BB this would suggest a continuation of the current trend. Bollinger Bands are best used along with other indicators, such as an oscillator like the MACD (Moving Average Convergence/Divergence) An indicator developed by Gerald Appel. By comparing moving averages, MACD displays trend following characteristics, and by plotting the difference of the moving averages as an oscillator, MACD displays momentum characteristics.

It is best to use only 1 indicator that shows overbought/oversold ie: stochastic and RSI

Moving Averages are lagging indicators and can be used as a trend follower, trend-following indicators work best when markets develop strong trends.

Through careful study and analysis, expertise with the various indicators will develop over time. As this expertise develops, certain nuances, as well as favorite setups, will become clear. It is best to focus on two or three indicators and learn their intricacies inside and out.

About the Author
Linda Wainman is author of the "Keeping It Simple Day Trading System"
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