Day Trading with Technical Analysis

In many cases, day trading and technical analysis go hand-in-hand. In order to be a successful day trader, it is useful to incorporate as much relevant information as possible into each and every trade. Because pricing information captures and displays the most recent trading patterns of a stock, technical analysis defines stocks in a way that fundamental analysis cannot. It also appeals to the short-term mentality of the day trader. There are many ways that technical analysis can be used to the advantage of the day trader.

Technical Charts-A Course in Behavioral Science

One useful feature of technical analysis is that it displays the behavioral trading patterns of the stock being evaluated. Questions involving how traders react to current breaking news on the security and how they typically behave during a specific month during the year for a specific security can be answered. In a sense, learning how to interpret technical patterns in a chart is a course in behavioral psychology. Each stock has a specific set of characteristics that illicit specific trading patterns, often repeated over time. 

The More Information the Better

Another useful feature of technical analysis is that it provides traders with a variety of clear-cut ancillary information. When incorporated effectively, this information can be used to make more educated and accurate trading decisions. Relative measurements, such as moving averages, relative strength, time and sales information, and candlestick patterns are all constantly changing based on the most current price information. These measurements allow the trader to know as much as possible about the current nature of a stock before entering into a trade. While no measurement can indicate an overall picture on it's own, when all of them are evaluated and incorporated into a timely trading strategy they can help add confidence to a trader’s decision on the direction of a stock. They more confidence a trader has, the better they will be able to manage their trades.

Identifying Ranges and Support/Resistance Levels

Technical charts can also provide information on the support and resistance levels of a stock. Typically, price movements on lower volume indicate weakness in a trend, while movements on higher volume indicate strength. The range of the price movement in relation to the volume for the day also provides useful information. Thus, combining price movements with volume can help to identify significant trading levels within a stock.

For example, if a stock exhibits four or five down days in a row, but each day has a narrow trading range with high volume. Then, the stock follows with two or three up days of heavy volume and wide price ranges, this can all be an indication of a significant support level in the stock. This is because large amounts of selling were absorbed before the stock changed direction on heavy volume. Information like this can be very useful to traders. All in all, technical analysis captures short-term information on a stock that fundamental analysis cannot, and the best approach is to use a combination of the two.

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