Technical Strategies

Technical analysis uses stock price moves to project future moves. Input is price open, high, low, and close, plus volume (OHLCV). Time interval ranges from one minute to one month.

Charts are used to spot trends and patterns. Chart readers have developed playbooks over the years that tie chart patterns to future price moves. Well known patterns are ‘head and shoulders,’ ‘double tops,’ ‘ascending triangles,’ and ‘cup and handle.’ The most popular charts are still price versus time. Candlestick charts came from Japan. Point & figure charts have a big following. Charts have been around along time, but they are much more fun with computers and access to online price data.

Indicators help traders see what the chart is saying. Indicators are calculated from basic price volume and added to charts. For instance, the 50-day moving average indicator is recalculated each day and plotted with daily closing price. A trading strategy could then be implemented to buy when daily price crosses from below to above the 50-day average. This crossover is taken as a signal that the stock price is in an uptrend. OHLCV is only 5 pieces of data per period. However, many indicators can be calculated from OHLCV. For instance Ward Systems Group, Inc.’s ‘Neuroshell Daytrader Professional’ product has over 800 indicators built in.

Technical trading strategies fall into two camps: trending and reversion. Trending strategies enter positions after a trend has developed. Trending strategies try to go with the momentum. Reversion strategies enter positions when a price move is about to occur, or when a new trend is about to start. Reversion strategies try to anticipate a change in momentum. Reversion is a subset of reversal and implies a return toward the long term trend.