After I wrote an introductory article on Technical Analysis tools for a Young Investor Newsletter sometime back, I received some other great questions by some undergraduate readers about applying the art of Technical Analysis.
I picked out three of the most frequently asked questions and wrote a follow-up article in response to those queries.
I thought these FAQs could be questions that are bothering you as well and so I shall share it here so that you can benefit from my answers too.
Read on and have fun learning about the usefulness of using Technical Analysis tools in your investment analysis!
If you have any questions after reading through, feel free to drop your questions in the comments area below.
I read with great interest your article on Technical Analysis in the Jun issue. I am a newbie in TA. Can you share with me which are your favourite Technical Analysis tools?
Like most things in life, the simplest tools are usually the most effective ones as well. In my arsenal of technical analysis tools, there are only three basic ones that I use without fail every time.
Other than these three tools, all other Technical Analysis tools are secondary and supplementary.
These three tools are namely, trend-lines, horizontal support/resistance levels and trading volume.
If an investor can master just the above three tools well, there is no reason why he could have miss any major market reversal points.
The rule of thumb is that when both the key uptrend support and key horizontal support are violated on heavy trading volume, this usually signals an important change in market sentiment from bullish to bearish.
On the other hand, when both the key downtrend resistance and key horizontal resistance are overshadowed by heavy volume, a major shift from negative to positive market sentiment could have taken place.
This usually means a further extended recovery from there.
The formation of most market tops and market bottoms will often display the above signs before the actual big movements happen.
If you are experienced enough to notice them, you will be able buy into a new bull market or exit a bear market earlier than most other market participants.
Is Technical Analysis used for short term trading only? Can it be used for long term investing as well?
Contrary to common belief, technical analysis is not only useful for short term trading but is also very helpful for long term investment decisions as well.
Although no one can provide a clear explanation, it has been observed that price trends do occur on a long term basis, whether it is for stocks, commodities or even currencies.
In the example of the USD /SGD chart above, we can clearly identify the existence of a clear downtrend channel that has developed over a period of 13 long years.
Do you use technical indicators? Which indicators would you recommend?
Like what I mentioned earlier in the first question, other than the three key Technical Analysis tools I use, all other tools are secondary; these include technical indicators.
Technical indicators are essentially derived from some formulae based on price action. As such, trading decisions should always be based upon price actions first, with technical indicators acting as secondary tools.
If I have to choose one technical indicator to use, I will use the MACD indicator as a secondary confirmation to my primary analysis based on trend lines, horizontal support/resistance levels and volume.
As long as the MACD indicator is not behaving contrary to my trend analysis, it means that I can proceed to issue the call to trade.
Any Other Burning Questions To Ask About Technical Analysis tools?
I hope my answers to the above three questions have provided you some of my insights about using technical analysis.
If you have any other burning questions you like to ask about Technical Analysis tools, please feel free to post your questions in the comments sections below.
I will try my best to share my knowledge and experiences with you!
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