The Basics of Technical Analysis

The primary strategy CAM Trading uses is Technical Analysis.  

What is Technical Analysis?  Essentially, it is chart reading.  Specifically, it is the science (or art, depending on your personal view) of recognizing chart patterns and interpreting them to make buying and selling timing decisions and implementing a trading plan.  Technical Analysis can help you not only make your decisions but make them more precisely, make them more disciplined, and can help you in managing your money more effectively.

Many Technical Analysis protagonists believe that everything you need to know about a security can be seen by looking at the charts.

Technical Analysis comes in two forms:

1. Price Patterns - these are simply visible patterns of what is happening to the price of the security.
2. Indicators - these are mathematical algorithms that take all aspect of the price movement, including volume, and are put together to form all kinds of ratios and analysis by which future price movements may be guesstimated.

The Problem with Relying Solely on Technical Analysis 

Fakes 


Be aware that Technical Analysis is not what you'd call an exact science.  In practice, this means don't get too hung up on precision.  As you gain more experience, you'll notice that no two historical price movement is ever exactly the same and believing so is an invitation for disaster.  


Behind the Scenes

What you see (real-time quotes) on your computer screen is only a half truth.  Fakes can occur where specialists and market makers identify extraordinary levels of interest around a support or resistance area and deliberately drive the price beyond that area to secure an advantageous position.  For example, a stock is falling down to a known support level where there are lots of sell stop orders.  Seeing this, the specialists work the price lower so that those stops are triggered.  In the mayhem of all this automated selling activity, the specialists are busy buying as much as they can, soon driving the stock price upward and securing a tidy profit for themselves. 

Eventually, the "specialists" and middle-men will go the way of the old phone and fax stock broker as financial systems and technology continue to evolve.