Finding trades with technical analysis

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I get asked a lot what it means to “use technical analysis to find a trade” in the stock market. There are actually many ways to answer that question because there are many ways of using TA as a tool. Here I’ll focus on how I like to use it.

At a minimum I think TA is very useful as the first step in the process of finding a trade by narrowing the field. There are too many stocks out there to manually consider them all, perhaps unless you’re a full-time trader. TA can act as the initial filter, bringing the list of stocks down from say 20,000 to 100 or 10. That’s a much more manageable number.

How does that filtering process work? It’ll be based on applying one or more technical indicators to the stock market. An indicator can be any numerical measurement related to a stock. Example indicators:

  • Price dropped >= 5% today
  • Price below the 50-day moving average
  • Volume is much higher than normal
  • Any of the well-known indicators like MACD, RSI, Bollinger Bands, etc. These are all numerical measurements, often comparing the current price with recent price history

Running any of these on the whole market should return a smaller set of stocks that meet the requirements of the indicator. From this list a trader can evaluate each stock and see why it showed up there. For example, did the price drop by 10% because it’s recent earnings report dropped by 10%? In that case the price adjustment seems fair. Or, maybe the price dropped by 10% because a few other stocks in the same industry showed bad earnings. If this one recently met it’s price target perhaps it was unfairly penalized and will quickly jump back up once people get over their emotional panic about this industry.

The holy grail of most technical analysts would be a a buy and sell “strategy” (combination of indicators and trade timing logic) that’s so reliably successful it can trade on it’s own without human interaction. I’m not sure how many times this has been achieved, or even whether it’s feasible over the long-term, but it’s definitely fun trying to get there.

Trading Blogs

Dayvejohnson on the Markets – Interesting trading log and TA/market commentary.
Wall St. Warrior – Analysis of potential trade ideas.
Trader Mike – Analysis of potential trade ideas and market commentary.

Trading Tools
Market Filters – Runs customized scans on the market based on selections of indicators.
Stock Charts – Very in-depth charts of individual stocks including many indicators.

The emotional stock market

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By about noon today, a few hours into the “cease-fire” in the middle-east, the major stock market indices are up about 1% on the news.

Why? Did the war have any tangible effects on the US economy? Oil futures increased, which would have an effect, but the oil market reacts to world events in very similar ways to the stock market.

To understand this reaction we need to see what decides the price of a stock. The price will change when future earnings change or when the amount (multiple) that people are willing to pay for those earnings change. Typically this is shown with the formula P = E x M.

To keep things simple, in this case, it looks like people had thought future earnings might be affected. I assume the reason would be that if the conflict spiraled into a larger war it could be disruptive to the US economy. I assume, again, that “disruptive” would mean a change in oil production in the region.

This is likely partly an emotional over-reaction because war has normally been considered “good” for the US economy. People influence their investing with their intangible bad feelings about the conflict. This makes sense but is good to understand to see what really goes on in the market.

Technical analysis of the stock market

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I’ve been interested in technical analysis for a long time. It seems like a useful way to spend some of my software development interests outside of work.Here’s a description as a starting point: Technical Analysis on Wikipedia. The goal is to use behaviour in the past to predict behaviour in the future. There are many methods of doing technical analysis; some use charts, some use non-visual methods.One problem I’ve always noticed is that most technical analysis methods seem to work fine for determining whether to buy or sell any particular stock, but how do you find the “best” stock to buy? That’s where more complex tools come in and can help search based on purely technical indicators. This article seems to describe the end-to-end process well: Building a Technical Buy Signal.Playing the market daily must be stressful for the professionals but it can definitely be fun for amateurs with a little extra savings they can treat as high risk.

Announcing Market Filters

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I’ve recently been involved in a project exposing some stock market analysis tools on the web. This happens to be a great combination of my interests in computer science and the markets. The tools have been in development, and private use, for the last 3 years. Finally we’ve decided to put them out on the web for other people to use.

The tools began when we started collecting market data and running our own technical analysis on it. Soon they evolved into a more defined set of analysis techniques and styles of reports. Our unique ranking approach is the foundation of the tools and it’s very informative to watch the movement of a stocks rank over time when making a trading decision. We’ve found the analysis very effective and use it in our trading every day.

The purpose of the website is to make advanced technical analysis easier. Other sites require programming, downloading tools, finding market data feeds, etc. This is everything in one place with no programming required. Except when back-testing the reports are run on current market data and are used to narrow the field of thousands of stocks to a handful for consideration.

The website is currently in Beta and we would like feedback.

Market Filters – Stock market technical analysis and scoring reports