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By now, you’re well aware of how to find trends using simple moving averages, such as the 50- and 200-day moving averages. But you should also know how to potentially spot when a trend could stop dead in its tracks, or birth a new trend.
All we have to do is wait for a crossover to do so.
For example, we can spot a bullish “golden cross” when the short-term moving average, such as the 50-day crosses above the longer-term average, such as the 200-day. When this happens, we’ll typically see a move higher in a stock or an index.
Look at the Dow Jones Industrials for example.
o the average trader, candlestick patterns are a bunch of crosses and oblong shapes with odd names, like the three black crows, or the abandoned baby bottom.
Some traders choose to ignore them. Others understand that it gives a clear illustration of the war between the bulls and the bears. In fact, every time you look at a candle you can see who is ahead, who is falling behind, and whether or not the war has come to a standstill of indecision.
For example, a doji cross is the perfect picture of indecision.
Whether you trade currencies, commodities, or stocks, understanding technical analysis is crucial to your success. Unfortunately, many traders continue to fall into the same trap of ignoring the basics like the head fake.
This can happen when a price temporarily moves higher, for example, giving the impression that a bottom may be in place. But as many of us are well aware, trading on the impression of recovery can be costly.
To many, technical analysis is useless.
But as we’ve proven countless times, such analysis is essential, especially when you’re trying to gauge the strength and weakness of momentum with support and resistance.
One of the best indicators to understand is the channel, defined as two parallel trend lines within a tight trading range. The upper line connects the price peaks in the channel while the lower line connects the price lows.
One of the best ways to lose money on any trade is to ignore multiple time frames.
For example, if I just rely on a six-month time frame, I miss the bigger picture trend that a one-year, two-year, and even a five-year time frame can offer. Looking at a six-month chart of the iShares NASDAQ Biotech ETF (IBB), it’s tough to gauge anything. It’s full of “noise” and not a lot of direction.
Understand how the market moves, and you increase your odds of success.
In theory, markets are pushed higher and lower by fear and greed -- two of the strongest psychological drivers of all assets.
For example, many times you’ll hear technical analysts refer to the ongoing tug of war between bulls and bears, or the struggle between buyers, which represent demand, and sellers, which represent supply. When looking at fear and greed on a chart, we begin to look at the technical parameters of support and resistance, or a price floor or ceiling.