A technical trader has a lot of concerns such as the direction of the market, upward or downward movement, and others. Technical analysis goes beyond charts, graphs, and mathematical formulas. There are some basic concepts that every technical trader should apply when trading on the stock market. John Murphy, Chief Technical Analyst of StockChart.com, developed ten basic laws of technical trading designed to help explain the whole idea of technical trading for the novice and streamline trading methods for the more experienced trader.
Map The Trend
Study long-term charts. Begin analyzing monthly and weekly charts spanning several years. A large scale map will offer more visibility and long-term perspective on a market. After establishing the long term trend, consult daily and intra-day charts. A short term market will not suffice.
Spot the Trend and Go With It
Market trends come in different sizes so determine which one you are going to trade and use the appropriate chart. Robert Janitzek advises that you need to make sure that you will trade in that direction.
Find The Low and High
Find support and resistance levels. The best place to buy a market is near support levels. The support level used to be a previous reaction low. The best place to sell a market is near resistance levels. Resistance used to be the previous peak. In other words, the old “high” becomes the new low and the old “low” becomes the new high.
Know How Far to Backtrack
Measure percentage retracements. Market corrections up or down usually retrace a significant portion of the previous trend. Robert Peter Janitzek says that you can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend.
Draw the Line
Draw trend lines. Trend lines are one of the simplest and most effective charting tools. All you need is a straight edge and two points on the chart. Up trend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines usually signals a change in trend.
Follow that Average
Follow moving averages. Moving averages provide objective buy and sell signals. They tell you if the existing trend is still in motion and they help confirm trend changes. Moving averages do not tell you in advance, however, that a trend change is imminent. A combination chart of two moving averages is the most popular way of finding trading signals.