The essentials in Technical Analysis for swing and day traders

We humans have a very hard time making fast decisions with complicated info. That is why, as human traders, we try to simplify trading as much as possible, in order to scan fast & accurate trading opportunities in a few seconds: KEEP THINGS AS SIMPLE AS POSSIBLE!

The following TA tools are part of our daily charting arsenal: CANDLESTICK, VOLUME, EQUIVOLUME, MA, FORCEINDEX, DMI, Up/Down/In/Out...

1. Simply because the large professional traders cannot help leaving behind considerable evidence regarding their opinion on the direction of the market: Volume provides clues as to the intensity of a given price move...
2. The Key is Psychology: you trade people, not stocks. People never change...most traders keep on making the same mistakes again and again...luckily for us...

A stock price is determined by an exchange between buyers and sellers. If there are more buyers than sellers then the market goes UP; more sellers than buyers then the market goes DOWN. The price at which a stock is offered affects the trader's decision. If a trader is long and the stock starts to decline ( bad news/many sellers), then the trader could be forced to close his position. If short, he might do likewise on a rising stock.
When a trader takes a long positions, he becomes a potential seller, while short positions are held by potential buyers.
As prices change due to buying and selling pressure, information about the condition of the stock is revealed by the combination of price and volume action.

In the 1600s, the Japanese developed a method of technical analysis to analyze the price of rice contracts. This technique is called candlestick charting. Steven Nison is credited with popularizing candlestick charting and has become recognized as the leading expert on their interpretation.

Candlestick charts display the open, high, low, and closing prices in a format similar to a modern-day bar-chart, but in a manner that extenuates the relationship between the opening and closing prices. Candlestick charts are simply a new way of looking at price; they don't involve any calculations.

Volume is simply the number of shares traded during a given timeframe (e.g., hour, day, week, month, etc.). The analysis of volume is a basic yet very important component of technical analysis. Volume provides clues as to the intensity of a given price move.

High volume levels are characteristic of market tops when there is a strong consensus that prices will move higher. High volume levels are also very common at the beginning of new trends (i.e., when prices break out of a trading range). Also, just before market bottoms, volume will often increase due to panic-driven selling.

Volume can help determine the strength of an existing trend. A strong up-trend should have higher volume on the upward legs of the trend, and lower volume on the downward (corrective) legs. Similarly, strong downtrends usually have higher volume on the downward legs of the trend and lower volume on the upward (corrective) legs.

Equivolume displays prices in a manner that emphasizes the relationship between price and volume. Equivolume was developed by Richard W. Arms, Jr., and is explained in greater detail in his book Volume Cycles in the Stock Market.

Instead of displaying volume as an "afterthought" on the lower margin of a chart, Equivolume combines price and volume in a two-dimensional box. The top line of the box is the high for the period and the bottom line is the low for the period. The width of the box is the unique feature of Equivolume - it represents the volume for the period.

The shape of each Equivolume box provides a picture of the supply and demand for the security during a specific trading period. Short and wide boxes (heavy volume accompanied with small changes in price) tend to occur at turning points, while tall and narrow boxes (light volume accompanied with large changes in price) are more likely to occur in established trends.

Especially important are boxes that penetrate support or resistance levels, since volume confirms penetrations. A "power box" is one in which both height and width increase substantially. Power boxes provide excellent confirmation of a breakout. A narrow box, due to light volume, casts doubt on the validity of a breakout in question.

A Moving Average(MA) is an indicator that shows the average value of a security's price over a period of time. When calculating a moving average, a mathematical analysis of the security's average value over a predetermined time period is made. As the security's price changes, its average price moves up or down.

Simple MA = (P1 + P2 + ... + Pn) / n

where P is the price being averaged
and n is the number of days in the MA

There are five popular types of moving averages: simple (also referred to as arithmetic), exponential, triangular, variable, and weighted. Moving averages can be calculated on any data series including a security's open, high, low, close, volume, or another indicator. MrSwing uses only the 10-20 & 50 day simple MA on closing prices.

Force Index is an oscillator developed by Dr. Alexander Elder in his SUPER book: Trading for a Living.

Force Index combines the three most essential pieces of market information - the direction of price change, its extent and trading volume. It provides a new, pratical way of using volume to make trading decisions.

Although Force Index can be used raw, MrSwing prefers to smooth them with moving average:
FI-3days MA & FI-13days MA.

A 3-day MA of Force Index is a very sensitive indicator which shows the short-term battle between the bulls and the bears. And the 13-day MA of Force Index identifies the longer-term battle between bulls and bears.

The Directional Movement Index (DMI) is a trend-following indicator developed by J. Welles Wilder, Jr., designed to determine whether a security is in a trending or non-trending market. Since the market is in a strong trend only about 30% of the time and in sideways about 70% of the time, this indicator is used to capture the period when the market shows significant trending or directional behavior.

The calculation of the DMI is fairly complex (see Trading for a Living), and consists of three lines:

+DI: current positive directional index, the range of highs divided by the price range over the last day and previous close, smoothed over a given number of periods.

-DI: current negative directional index, the range of lows divided by the price range over the last day and previous close, smoothed over a given number of periods.

ADX: modified moving average of the difference of +DI and -DI divided by the sum of +DI and -DI, multiplied by 100.

Up/Down/In/Out is a chart overlay available on SwingTracker that color-codes individual bars or candlesticks based on price movement. It relates the current high and low price with the previous high and low price.

Up (Green) indicates the current high is higher than the previous high and the current low is higher than the previous low.

Down (Red) indicates the current high is lower than the previous high and the current low is lower than the previous low.

In (Yellow) indicates the current high is lower than the previous high, and the current low is higher than previous low.

Out (Blue) indicates that the current high is higher than the previous high, and the current low is lower than the previous low.

Again, it is our strong belief that there is only one easy way to trade with discipline and that is when you keep things simple: BEAUTY THROUGH SIMPLICITY.

This should be a general rule of everything you do in life:
KEEP THINGS AS SIMPLE AS POSSIBLE