Traders use momentum trading to look for signals such as whether a stock is on the verge of popping up i.e. undertakes a specific price position on high volume for a certain time period that ensures profits. Traders who use the momentum trading technique automatically engage in technical chart reading and analysis wherein they look for stock breakout signs. However, the technical trading indicators used in this strategy are nothing in comparison to the wide variety of graph and chart patterns that are typically available before the traders.
Before proceeding further, it’s important to understand more about the different types of traders and trading styles:
• Scalping: Traders who engage in scalping place many trades on a daily basis, which further enables them in scalping a small amount of profit for every single trade by using the bid/ask and spread strategy.
•Technical Trading: Such traders use graphs and charts extensively, wherein they try to look for signals of divergence and convergence that could further indicate signs for buying or selling.
• Momentum Trading: Traders who rely on the momentum trading technique search for stocks, which are showing significant movement in a specific direction. Hence, they make an effort to utilize the momentum for earning desired profits.
• Fundamental Trading: Fundamental trading is all about examining and anticipating earning reports, acquisitions or reorganizations and stock splits.
• Swing Trading: This form of trading is carried out by traders/investors who’re interested in holding their trade positions for more than a day. They are primarily fundamental investors as any change in the corporate positions or fundamentals usually require a couple of days or maybe weeks for producing a movement in price that is sufficient for them to make enough profits.
Traders who’re new to trading can experiment with one or more of these trading styles. However, it’s important that they pick any one specific style or technique that matches their trading experience and knowledge.
Technical Trading-What is It?
Technical trading is basically a very broad concept where traders utilize easy to understand past patterns for predicting the stock’s movement in the future. One of the biggest challenges of analyzing the stock technically is that a trader needs to deal with multiple indicators, which could easily leave anyone confused. Besides, there isn’t any one indicator, which can be regarded as the best universally since every indicator or a couple of them put together are fit for specific situations only.
While, some indicators are fit for specific industries, others are ideal for popular stocks of a specific category. Hence, technical indicators should not be utilized for buying or selling. In fact, similar to momentum indicators they cannot predict the exact time of buying or selling. However, they’re excellent for identifying the stocks that can be analyzed further. This is precisely why, technical indicators analysis is only the beginning point and the historical data and patterns cannot clearly predict the performance of the stock in future.
Below discover more about some of the most commonly used technical indicators:
• Relative Strength Index: The RSI measures how a stock has performed recently as opposed to its historical data. The RSI does this by way of comparing the magnitude and number of historical and recent up as well as down closes. In case the Relative Strength Index goes beyond 80, it indicates that the stock has been overbought, which further indicates a selling signal. On the other hand, when RSI is under 20, it indicates an oversold position i.e. a buying signal.
• Pattern Analysis: In this type of analysis, the price charts are thoroughly analyzed for identifying specific patterns, which have appeared in the case of the same asset/stock historically. Some of the patterns that are usually taken into consideration are head/shoulder patterns, rounded bottoms or rounded tops etc.
• Trend Analysis: This analysis is extremely complex as it gauges short as well as long-term stock trends. Additionally, this particular analysis focuses on identifying crossovers. The long-term average is known as the moving average and the moving average convergence divergence i.e. MACD is utilized for identifying crossovers, convergence,divergence and oversold or overbought conditions.
•Trading Ranges: Trading ranges are basically the low, high as well as close prices that are visible on the graph/chart for a specified time period. The support as well as resistance lines are also visible on this graph. Breakouts happen after the prices sustain movements, below or above the trading range.
• Gap Analysis: Gap takes place when the price at which the stock was opened is way too lower or higher in comparison to the price it was closed at previously. This happens primarily due to some news that the company may have announced overnight and a couple of other factors. The trader who resorts to gap analysis is essentially worried about the stock’s performance below or above its opening price that may further indicate its movement either up or down.