So you spotted a stock and it seems to be forming a pattern that you learn somewhere in a textbook or seminar. You can't wait to pull the trigger and make some money. But wait! Before you put your hard earned money on the line, here are 10 things you should absolutely consider before trading.
1. Price Pattern
Most trading decisions if you are using technical analysis to trade will be made when a stock forms a compelling chart pattern. Chart patterns such as double bottom, double top, pennant or flag gives us a tradeable opportunity in the stock.
There are 2 things to consider in price pattern
There are 2 things to consider in price pattern
- You need to have a compelling chart pattern
- Different time frames of the stock should confirm the chart pattern you see
Below is an example where we saw a daily double bottom in the stock DST. But will the double bottom work?
In order to answer that question, we seek the answer by looking at a higher timeframe. In the monthly charts, we saw that DST was forming a daily double bottom at a monthly support area. This gives us the conviction that the double bottom will work.
2. Individual Candlestick Pattern
Ever since Steve Nison popularized the use of Japanese Candlesticks in America, most trading textbooks have a mention of this trading tool. It is not much different from the OHLC bars but I have to admit they are more visual.
Candlesticks analysis is quite important especially when you anticipate that a stock is about to reverse direction. So if you can, learn a few of the candlestick reversal patterns. A topping tail and bottoming tail is one of my favorites as its easy to see and the message is powerful.
Candlesticks analysis is quite important especially when you anticipate that a stock is about to reverse direction. So if you can, learn a few of the candlestick reversal patterns. A topping tail and bottoming tail is one of my favorites as its easy to see and the message is powerful.
In the chart above you can see ANSS having both the topping tail and the bottoming tail in a short time. Combining with price analysis and other indicators, the message here is clear, the stock is about to reverse direction.
So the next time when you think a stock is about to change direction, look for Candlestick signals too. They strengthen your analysis.
So the next time when you think a stock is about to change direction, look for Candlestick signals too. They strengthen your analysis.
3. Support & Resistance Analysis
Whenever I look at a stock, I always try to see whether there is support underneath or resistance above. If there is support underneath, it gives me more confident to buy the stock when it reverses. If there is resistance ahead, I might want to exit just before it reaches there.
There are 2 types of support:
Whatever it is, you want to have at least some support underneath to have safety when you buy a stock. Reverse it if you plan to short. Lots of resistance overhead provides safety for the short seller.
There are 2 types of support:
- Major Support (lots of price consolidation)
- Minor Support (less price action there)
Whatever it is, you want to have at least some support underneath to have safety when you buy a stock. Reverse it if you plan to short. Lots of resistance overhead provides safety for the short seller.
You can see how important support is in the stock chart above. The stock actually stop dropping when it reach the support. If you do no really understand support and resistance learn all you can about it.
4. Is The Stock In An Uptrend Or Downtrend Or Trading Sideways
This is something that most people do not spend time considering at all. Most will just jump into a stock without any consideration. There is a famous saying in the market that goes like this
"The Trend is your Friend"
Meaning, you will make money if you know what trend your stock is in. The images below will show you what to do in each situation.
5. Are You A Trend Follower Or Do You Pick Tops & Bottom
Most people will do better if they follow the trend and trade it from that direction. If a stock is in an uptrend you trade the stock buying dips and breakouts. If the stock is in a downtrend you short the breakdowns and rallies.
Some only trade a stock that is in an uptrend.
Some will trade stocks that are in an uptrend or downtrend.
While some will do better trading stocks that are trading sideways.
You will do better picking a system that fits your personality.
I personally encourage my readers to trade uptrends and downtrends as they are easier to trade and you can spot setups easily. Trading both trends also allows you to profit when the market goes up or down.
Some only trade a stock that is in an uptrend.
Some will trade stocks that are in an uptrend or downtrend.
While some will do better trading stocks that are trading sideways.
You will do better picking a system that fits your personality.
I personally encourage my readers to trade uptrends and downtrends as they are easier to trade and you can spot setups easily. Trading both trends also allows you to profit when the market goes up or down.
