Good morning.
Regardless of whether you love it or hate it, technical analysis has become a very popular trading and investing tool, which people seem to try and apply in every position they make.
Personally, I feel that technical analysis can be a great trading method (especially for intra-daily trades) and that it can yield some very strong trades. However, the nature of it's huge growth in popularity means that people are now trying to apply it in cases where it was never intended to be used.
When I use it:
1. When daily volumes are high and consistent:
- This will obviously vary between stocks, but I would say that if there isn't a trade at least every one to two minutes then using technical analysis isn't going to yield any better results than luck.
2. When judging an entry:
- On some of my longer positions (days or weeks) I will use intra-daily technical analysis to judge at what price I may make an entry into a stock at. These picks usually have a fundamental reason behind the trade as well - not just pure technical trades.
3. Making pure technical analysis trades:
- This sounds obvious, but in these trades in particular I would be looking for trend lines on the chart and as many other factors (moving averages, etc) to go along with my technical analysis. In my case these trades will either be intra-daily or will only last a couple of days. Furthermore, to ensure the accuracy of these purely technical trades, I will pretty much only chose FTSE 250 stocks or AIM stocks with high volumes and low spreads.
A word of caution:
Technical analysis can make some great trades, but because it's a retrospective method an analytic tool, it means that fundamental changes in the company can cause huge changes in the technical analysis that can thus cause poor signalling in either the long or short direction. Therefore, you need to be very careful when using it with high "news beta" stocks as mis-signals will be commonplace.
Good luck,
The Masked AIM Trader.
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