Let’s be honest. You can read everybody’s blog, you can learn about every proprietary trading system, and pay loads of cash to “trade alongside” every person who thinks they’re an expert but if it were that easy, why isn’t every trader setting limit orders from the deck of their mega yacht?
It’s because most of what you read is noise and it’s not going to help you make the same successful trades that everybody brags about. (Many of “those people” are lying, by the way; so don’t compare yourself to anybody else.)
If that’s the case, then what should you study? Like most things in life, the simpler you make it, the more success you’ll find. Here’s where to start:
Keep an eye on the major moving averages. Watch the 50-day moving average closely. Then, overlay the 20-day and the 200-day. You’ll read articles where people watch the 150-day, the 10-day and just about every other number. If you look hard enough you’ll find correlation somewhere but if you watch nothing other than the 50-day, that will be enough for majority of your trades.
Want proof? Pull up a six-month chart of a few of your favorite charts and study what happens when a stock trades around the 50 day moving average. Netflix (NASDAQ: NFLX) is a prime example.
The technical analysis gurus of the world don’t put much stock (pardon the pun) in patterns unless they’re backed by heavy volume. Volume doesn’t so much indicate the movements of individual investors; it’s a tell of what the big institutional investors are doing. If they’re bailing en masse, so should you. If the stock is heading higher on heavy volume, jump in at least for a very short-term trade.
The advantage of volume is its lack of interpretation. Anybody can read it, understand it, and if you ask five “experts” they’re all going to read it the same way. (Or at least they should.)
Pull up a chart of Deere (NYSE: DE) and you’ll see a well-defined triple-top. You’ll also see that it broke through the bottom of its trading range. That’s bad news. Look at Domino’s Pizza (NYSE: DPZ) and you’ll see a textbook rising channel. If you want to get slightly more academic, look at Life Time Fitness (NYSE: LTM). It formed a head and shoulders pattern that resulted in a big move to the downside.
If you want to watch for cup and handles and all of those other more obscure patterns, you’ll sound really smart at parties but the likelihood of it making you money isn’t high. Tops, bottoms, channels, and even wedges are worth watching. The others, you can probably do without unless you have a team of experts and high-powered computer algorithms at your disposal.
Do what works for you. If you’re finding success following other indicators, then keep doing it. If you’re spending a lot of time watching RSI, MACD, and Bollinger Bands, but it’s not making you any money, try a simpler trading strategy.
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