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Why Technical Analysis

When people find out I’m a trader, one of the first things they as is “what stock should I buy right now”? My answer, of course, is that I have no idea.

They want a buy-&-hold investment. They’re wrapped up in their own jobs and lives, and they wouldn’t notice something like a lower high or a high-volume reversal as a signal to bail out. They need some diversity, a long-term outlook, and most importantly, an advancing stock market.

I’m a technical trader with a short-term horizon. If something doesn’t act right, I can change my opinion in a heartbeat. I may even reverse my position. The market can stagnate and I can still make money. That’s the beauty of being short-term. I only have to be right for a limited time, ring the register, and then move on to the next trade.

When I try to explain why I select trades on a technical basis, several reasons always surface:

Short-term trades are all about supply and demand. Technical analysis is founded on price action, not fundamental trends over the course of a business cycle. I want something that can pay me today. Waiting for next year isn’t going to work for me. Chart patterns help me take notice of support, resistance, and momentum which will tell me whether I should be in or out of a stock. Knowing where buyers and sellers lurk provides me with opportunities to make money as I consider the emotions each group may be dealing with. Only technical analysis can reveal this.

Technical analysis of chart patterns provides me with good risk/reward setups. Trading is much more about money management than many give it credit for. By entering positions where I stand to lose only a little if I’m wrong but make much more if I’m right, my approach puts me at a big advantage. Finding chart patterns with a nearby stop-loss allows me to put my money to work with more confidence.

Trading on fundamentals puts me at a disadvantage. If I try to convince myself that my research of XYZ Company will reveal the same information that a multi-billion dollar fund can uncover, I’m kidding myself. Scouring Yahoo Finance in my spare time and trying to guess what next quarter will hold for a company will never compare to a research team that’s regularly in touch with management. The little guy doesn’t have access to the same info as the big dogs, so the playing field isn’t level.

I can compound my money faster. Technical trades are short-term in nature, so I’m in and out of the market much more frequently, compounding my money. Making 5 consecutive trades which each earn me 2% on my money will outpace the return of making one investment which shows me a 10% gain. Considering that fundamentals can take months, quarters, or even years to play out, I’m convinced that consistently hitting singles in the meantime will put me in the Hall of Fame without trying to uncover the next Microsoft or Cisco.

“Good companies” don’t always go up. The object is to turn a profit when my money is at risk. That means only one thing: if I’m buying a stock, it better be moving up. I don’t care if it’s a great company or not, if there’s no demand for it or no new money flowing into it, then it is not going higher. While a company may be great right now, how long will I have my money sitting in it before it is discovered? What opportunities might I miss elsewhere because I’m waiting for this one to pan out? No thanks! Good investments go up, not necessarily good companies.

Ultimately, I put my capital at risk only when opportunities present themselves, and preserve it the rest of the time. Trading with a technical approach allows me limit risk, maximize rewards, and even have a plan of action as I go.

How I Select Trades

When looking for shorts, I want to see lower highs, downside volume and relative weakness to either the market or that particular stock’s sector. This indicates to me that pressure remains on the stock and the path of least resistance is still down. Any stock that is unable to participate in market strength gets my attention quickly.

The next morning, I set alerts in my CyberTrader Pro trading platform which will trigger when the stocks from the newsletter meet their breakout prices. Most of the time, I set these alerts to actually get me into the trades automatically for at least a partial position. I also set up my watch lists in Trade-Ideas Pro, which helps me to gauge momentum and relative volume. Their product is excellent, and is an essential part of my trading.

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How I Select Trades

As I move through the list, I keep a finger on the “F” key and “flag” the stocks which are good enough for a closer look. After screening the big list, I am left with about 50 flagged stocks which I look closer at to determine my trade candidates which will be in the swing trading newsletter. It is at this point that I separate the good from the great. I want stocks which are able to move. A stock like MSFT which sees daily changes of only a few cents is just not a candidate. I want potential for a good, quick profit. I also want to find tight setups where my stop is nearby. A wide, sloppy chart will add slippage and make it more difficult to know when to exit. This is why I often overlook momentum stocks which have already broken out. Why make trading any more difficult than it already is?

Volume is the next thing I will really key in on, as it is the best true measure of activity and just what the “big boys” are doing. Does volume support the overall look of the chart? Has there been more activity lately than normal which may indicate a move is about to occur? If so, then that stock makes my list.

How I Select Trades

Now, how do I go about finding those trades? Each night I begin with all the stocks in the market and run some basic scans on them which filter out the low-dollar stocks and the low-volume stocks using TCNet, my charting software. Once I have the remaining list, which is typically about 1600 stocks, I sort that list by their close relative to that day’s range. This simply means the stocks at the top of the list finished the day near their highs, and the stocks at the bottom of the list finished near their lows. Sorting by this helps me to first find my likely long candidates and then move on to the short candidates, as I typically like continuation plays. Once the list is sorted, I use the spacebar to screen each stock in pretty rapid succession. Going through the list takes me about an hour. Simply scrolling through so many stocks each night also helps keep tabs on the overall market health.

How I Select Trades

Having said that, let me touch on the last comment regarding stops. One of the first things I want to know before I take a trade is how much I am likely to lose in case I am wrong (and I will definitely be wrong some of the time). This helps me to determine two things: position sizing and profit expectation. If I am willing to lose $1000.00 on a trade and the natural stop is 1 point away, then a position size of 1000 shares will be obvious. Furthermore, if I want to keep my reward-to-risk relationship at 3 or 4 to 1, then I would look to pull at least 3 times my potential loss out of the trade on the profit side. This would be a 3 point profit for this example.

How I Select Trades

How I Select Trades

Successful trading is about managing trades once you are in them, regardless of where they came from. I think a great trader could probably turn a profit taking random trades, as long as he manages them well. Now I do believe that finding quality chart patterns is essential, mostly because trading good setups in liquid stocks allows for the best risk/reward relationship on the front end. That is why I run my swing trading website – to highlight the best charts in the market for potential trades. My trade selection process is based on my ability to manage those trades, therefore I want to find only the best. Why not predetermine your stop in case you are wrong by taking the trades with a natural stop-loss nearby?

The role of stock exchanges

Stock exchanges have multiple roles in the economy, this may include the following


Raising capital for businesses
The Stock Exchange provide companies with the facility to raise capital for expansion through selling shares to the investing public.

Mobilizing savings for investment
When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels and firms.

Facilitating company growth
Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion.

Profit sharing
Both casual and professional stock investors, through dividends and stock price increases that may result in capital gains, will share in the wealth of profitable businesses.

Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately-held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies. The dot-com bubble in the early 2000s, and the subprime mortgage crisis in 2007-08, are classical examples of corporate mismanagement. Companies like Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001), Webvan (2001), Adelphia (2002), MCI WorldCom (2002), Parmalat (2003), American International Group (2008), Lehman Brothers (2008), and Satyam Computer Services (2009) were among the most widely scrutinized by the media.

Creating investment opportunities for small investors
As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors.

Government capital-raising for development projects
Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such bonds can obviate the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.


Barometer of the economy
At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.

The First Stock Exchanges

In 11th century France the courtiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. As these men also traded in debts, they could be called the first brokers.

Some stories suggest that the origins of the term "bourse" come from the Latin bursa meaning a bag because, in 13th century Bruges, the sign of a purse (or perhaps three purses), hung on the front of the house where merchants met.


House Ter Beurze in Bruges, Belgium.However, it is more likely that in the late 13th century commodity traders in Bruges gathered inside the house of a man called Van der Burse, and in 1309 they institutionalized this until now informal meeting and became the "Bruges Bourse". The idea spread quickly around Flanders and neighbouring counties and "Bourses" soon opened in Ghent and Amsterdam.

In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351, the Venetian Government outlawed spreading rumors intended to lower the price of government funds. There were people in Pisa, Verona, Genoa and Florence who also began trading in government securities during the 14th century. This was only possible because these were independent city states ruled by a council of influential citizens, not by a duke.

The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits—or losses. In 1602, the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds. In 1688, the trading of stocks began on a stock exchange in London.

On May 17, 1792, twenty-four supply brokers signed the Buttonwood Agreement outside 68 Wall Street in New York underneath a buttonwood tree. On March 8, 1817, properties got renamed to New York Stock & Exchange Board. In the 19th century, exchanges (generally famous as futures exchanges) got substantiated to trade futures contracts and then choices contracts.

There are now a large number of stock exchanges in the world.