• Trading 101: Keeping It Simple

    by  • December 26, 2012 8:54 am • Trading 101 with Peter Bryans • 1 Comment

    Today (arguably more than ever before) technicians have numerous charting tools at their disposal. If you are new to the field of Technical Analysis (TA), it can be a little overwhelming to try and learn about all of the various indicators and overlays that charts have to offer. A credible site, designed to educate beginners, is a place called “Chart School”—you can find it at this link on stockcharts.com. For those new to TA, I recommend you begin there.

    As you learn about moving averages, oscillators, momentum indicators, and bollinger bands, sorting through these tools and finding ones that help you the most will be a process. My advice early on would be to keep things simple—the more overlays and indicators you have surrounding the price action on a chart, the more confusing it can be.

    Take the below (daily) chart of Apple (AAPL) as an example. There is a whole lot going on—50, 60, 80, 100, 160, 200 day moving averages as well as bollinger bands, momentum indicators, and oscillators. It can be difficult to discern between the various chart instruments. This is generally what my charts look like, and even I have to remove things from time-to-time. With all of the moving averages crossing over and chart overlays surrounding the candlesticks, it can get you away from the most important thing in TA—price.

    (chart courtesy of e-Signal–click to enlarge)

    Below is also the same chart of AAPL—with simply two moving averages and volume bars. The 50-day moving average (blue line) and 200-day moving average (red line) are more commonly used. A rising 50-day suggests a short-term uptrend, and a rising 200-day suggests a long-term uptrend. As a general rule, a change in trend is considered when the 50-day crosses above/below the 200-day moving average. This crossover can help you to determine if there is indeed a change in trend, and therefore advise you to be cautious when trying to call a bottom—something that far too many people have failed to do over the past few months with this particular stock. Often times, you need very few things to aid you in your TA, and the rest just turns out to be “noise”.

     (chart courtesy of e-Signal–click to enlarge)

    As you continue to trade and gather knowledge in the field of technical analysis, personalizing your charts will be a step in forming your trading system. Using different indicators and overlays at different times is certainly useful, but keeping it simple and just focusing on price and volume can work wonders. 

    About

    Peter Bryans joined the Schaeffer's Investment Research trading team as a Trader in April, 2012. A graduate of the Fisher College of Business at The Ohio State University -- where he concentrated in Finance -- Peter previously held internships with an insurance broker and a wealth-management firm. In his current role, Peter trades a variety of our real-time option services and also hosts our "Options Apprentice" weekly webinar presentations.

    http://www.schaeffersresearch.com

    One Response to Trading 101: Keeping It Simple

    1. John Little
      December 27, 2012 9:02 am at 9:02 am

      I totally agree. When I was first learning I read a book that advised using no more than 5 indicators. Those 5 and the weighting you assign will vary for individuals and may change over time. I still like the MAs, Stochastics, MACD, RSI and volume.

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