Investing money in stocks and waiting to see how it turns out is one thing, but effective trading to maximise the benefits requires a much more informed and strategic approach. The key difference between traders and smart traders lies in the use of trading tools like technical analysis to make accurate decisions.
The scope of technical analysis is pretty massive, with an array of indicators present to help and guide technical strategies. When used correctly, this trading methodology can help predict future prices, recognise market trends, identify entry and exit points, and more. Join us as we explore how technical analysis can be the base of a successful trading strategy.
Picking the Right Technical Indicators for Trading Strategies: Different Approaches
Technical analysis involves multiple components, including price patterns, charting analysis, and technical indicators. When it comes to picking the right technical indicators, there are three popular approaches:
The Gut Feeling
The gut feeling is a crucial influencing factor, and indicators may confirm the same. However, this can lead to a natural bias towards a selective indicator and prevent you from ignoring stronger indicators.
The Consensus
When multiple indicators signal in the same direction, it gives traders the confidence to make an aligned decision. The risk of signal lag or redundancy remains.
A Selective Approach
When hundreds of indicators exist, the best approach is to select indicators suitable for the current situation; for instance:
- Simple Moving Averages: These indicators, commonly called SMAs, simply indicate the average price in a specific period. They provide quality guidance for both trending and sideways markets. The simple nature of these indicators makes them useful in various market conditions.
- Bollinger Bands: These indicators detect the change in price volatility and expected trading ranges. Naturally, they are a valuable tool to help navigate the ranging markets.
- Stochastic Oscillators: These are quantitative measures that determine the momentum of the market and gauge overbought or oversold levels. They compare the closing price of a security with its price movement over a defined time period and help to predict possible reversals in price.
- Trend Lines: These charting tools help figure out the current direction of the market prices.
Drafting Technical Analysis-Based Trading Strategies
The following are some of the tried and tested trading strategies with technical analysis at the base:
Trend Following Strategy
The trend following strategy expects the price movement to follow its current direction and not reverse. This strategy enables traders to find the optimal entry point into a trend using stochastics and oscillators to identify trend reversals or retracements. The peaks and troughs signal the price to return to its original trend. These indicators work great when paired with trendlines that identify support and resistance levels.
Trendline Break Strategy
The trendline break strategy provides trend-following traders with a break signalling a potential exit point. It could also be predicting a change in the market sentiment, resulting in new trends in the opposite direction.
Breakout Strategy
A breakout strategy is entering the trade as soon as the price crosses a predetermined range. Traders prefer high momentum, relying on the breakout itself as a signal to initiate positions and ride the subsequent market move. They can enter positions manually by watching price action or place buy-stop and sell-stop orders for automatic execution. Stop-loss orders are usually set just below the last resistance level or above the previous support level to control risk. For exit points, traders tend to use traditional support and resistance levels to define possible price targets.
Retest Strategy
The retest strategy in trading is waiting for the price to come back to a previously broken support or resistance level before taking a position. Following a breakout, the price tends to go back and test the strength of the new support or resistance level. Traders utilise this retest to validate the strength of the breakout and minimise the risk of false signals. By waiting patiently for this retest, the traders are able to obtain improved entry points and increase the chances of a successful trade.
Find Advanced Technical Analysis Tools at Indiabulls Securities
A comprehensive analysis of the price movements and identification of exciting trading opportunities requires advanced technical analysis tools. By bringing such tools within access for all traders, Indiabulls Securities Limited has made it easier to come up with effective trading strategies.
