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We’re often told that technical analysis is a waste of time.
Traders are often told to ignore it altogether.
“Technical analysis is fundamentally flawed,” says Forbes.
“Technical analysis is stupid,” blared The Motley Fool.
But it’s just not true. In fact, technical analysis is just as important as fundamental analysis.
When it comes to trading, one of the best ways to tell how strong or weak a stock may be is by paying attention to the Money Flow Index (MFI).
In its simplest terms, money flow is another momentum indicator that indicates strength of money flowing in and out of a stock. If the flow of money into the stock is weak, we’ll begin to see MFI trend down. But as money flows into a stock, we can see this happening when MFI trends up.
It’s also essential in determining overbought and oversold conditions.
It’s not difficult to understand why candlesticks have become so popular.
Unlike your typical bar or line chart, candlestick charts tell us four essential things in a given day – the open, high, low and close. More importantly, they can tell us how strong or weak the bulls or bears are at a point in time.
For example, if I spot a doji cross at top of trend, it’s an indication of indecision among the bulls and bears. It can also tell technicians – based on historical observations – if a trend is likely to reverse in the opposite direction.
Traders are often told to buy excessive fear or greed.
Unfortunately, many of those traders aren’t aware of when to pull the trigger, or realize when fear or greed have gotten way out of control. Then, when they finally do decide to make the trade, the stock has already begun to pivot.
And more often than not, they miss the profit opportunity.
While none of us have a crystal ball, or hold the Holy Grail to trading secrets, you can give yourself an edge by simply paying attention to what herd mentality is telling you.
“Opportunity is missed by most people because it is dressed in overalls and looks like work.”
Those very words of Thomas Edison still hold true today.
But rest assured, that’s a mistake – a potentially costly one that’s cost investors millions, especially when they overlook game-changing opportunities.
Most of us are familiar with what happens when you pull a rubber band too far.
It has a tendency to snap back. That same idea applies to stocks, too. For example, if a stock sells off too much too fast, it has a tendency to snap back, or revert to mean.
Or, if a stock runs too high, too fast, it’ll often snap back as well.