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When it comes to technical analysis, moving averages are essential.
For example, for more than 20 years, I’ve relied on two specifically – the 50-day and the 200-day simply moving average. Not only am I looking for crossovers for golden and death crosses, I want to see if a stock is holding its own above them.
When bungee jumpers plummet off a bridge, what happens?
They pop back up, right?
The very same thing happens with stocks when they become too overbought or oversold. And if we can position ourselves for the exact moment the “snap back” happens, we can make money. And it’s actually quite easy to spot.
Way back in the 1700s, Munehia Homma first created candlestick charts for rice trade.
Oftentimes, he would record the opening day’s price of rice, the low and the close.
Over time, he’d begin to see price patterns in his recordings, mapping out repetitive signals in the price bars.
“Why would I want to touch a stock that just plummeted?”
My answer, “Why not?”
What many traders don’t understand is that many pullbacks create opportunities, especially when it happens to a well-known stock.
But that doesn’t mean you should run out and buy any stock because it pulled back.
Technical analysts attempt to predict direction by studying past price action and charts. And understandably, there are critics. In fact, some see it a pseudo-nonsense.
Any time you use technical analysis, confirmation is essential.
If you’re not willing to confirm, you’re doing yourself a great disservice. In fact, at no time will I ever just use Bollinger Bands (2,20), MACD, relative strength, or Williams’ R% alone.
That’s an amateur, foolish move.