Tuesday, February 2, 2010

TECHNICAL ANALYSIS FOR DUMMIES


There's a car in front of you and you are trying to determine where it's going, just like how we look at price and volume to predict future movement.

If you look at the diagram above, you'll see an intersection. Now, only when the car reaches the intersection do we have the chance of figuring out the most likely direction the car will go (similar to when we first look at the chart of a stock).

When the car reaches the intersection, it can do several things:

1) Stop at the stop sign and wait.
2) Stop and go straight.
3) Stop and turn right.
4) Stop and turn left.
5) Not stop and speed straight through the intersection.
6) Not stop and turn right.
7) Not stop and turn left.
8) Make an illegal U-turn.
9) Stop and back up into you.

etc...you get my drift.

There are so many possibilities in this illustration. What if the car turns on a left- or right-turn signal, is there a guarantee that the car will turn in that direction? No, of course not. In fact, yesterday, I saw a driver turn on her left-hand signal in the left lane and then turned right, nearly causing an accident which reminded me of this illustration. The stock could go up or down, but is there a continuation?

We all probably busted illegal U-turns at intersections at one time or another. Is it easily predictable? No. I've also seen people accidentally shift in reverse at a red light, hitting the person behind them. Sometimes sudden reversals occur in stocks and if you aren't careful, you could hit or get hit.

Sometimes a car will ignore all the traffic signals and go straight through an intersection, whether intentionally or unintentionally. Sometimes, stocks can make extreme movements, up and down, and we could miss them or get caught on the wrong side. These are usually deadly.

Now let's say that you are in front of a driver that turns on his/her left-turn signal. You are reasonable sure that the next action will result in a left turn. It is the highest probable action the driver in front of you will take. Even still, it is not 100% guaranteed. When you see the car actually make the left turn, your odds significantly increase. You can predict that the driver will make the left turn before the left turn is fully complete.

These are signals that technical analysis produce on stock charts. These are your basic high-probability setups. Technical analysis itself is not enough, though. Ultimately, you are responsible for properly observing the signals you receive and to act in the best way possible according to the highest probable odds.

----

Other stuff:

1) The tape reading series will resume this week.
2) The inside day yesterday was executed according to plan.
3) All four indices will be re-testing the 100-day MA. Beware as the 100-day is a strong and reliable MA.

Good night.

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