• TechniTrader - Technical Analysis Training

There are many different Technical Analysis Theories and Methodologies that have been developed over the years. The first concept was developed using a simple line chart of the end-of-day price with a smoothing mechanism, the simple moving average. At the time, moving averages were first used by technical analysts for studying price action on stocks and/or indexes. 

The goal was very simple: to determine if the long term trend was still intact. When the price line dropped below the moving average, the analyst was able to determine that the trend was no longer intact and that a shift from upside trending to downside trending had occurred.

The problem with this very simple approach was that the moving average requires price to be present on the chart before it can create the corresponding moving average. This meant that the moving average lagged behind the stock price trend action, often by many weeks or months and with a huge loss of the profitability prior to the downturn and moving average trend shift. 

Despite many different variations of moving averages that attempted to eliminate this lengthy lag time, moving averages, by their inherent formula and nature, continue to lag price. In the modern automated marketplace, and especially in countries such as the US, Canada, and Europe, moving averages lag substantially due to the computer generated order processing systems and the more complex Market Participant Groups. 

Since the early days of moving averages and line charts, technical analysis has continually evolved and many theories have been written and designed. Some are excellent. Others were promoted without empirical evidence and substantive proven results. Therefore, a student of technical analysis must not only be sure that they are studying the most current technical analysis concepts and theories but must also make sure that a theory has empirical evidence to support any claims made by the technical theorist.

Most retail traders start out learning about technical analysis either through books published on the subject or by visiting one of the many websites on the internet that feature a technical analysis theory or information about technical analysis in general. Some websites are outstanding with excellent technical theories; others are outdated, lack theory probabilities, and poor technical analytics.

Students of technical analysis must do due diligence and be careful to avoid theories that claim predictive capabilities, forecasting capabilities, use non-scientific concepts such as astrology, or other unreliable theoretical concepts.

Not every book written and not every theory promoted for technical analysis is reliable or proven. The problem with predictions is that no one can predict the future, especially long term predictions. 
Scientists who study earthquakes, volcanos, and tsunamis are still unable to predict precisely when these catastrophic events are about to occur. No scientist can accurately predict how climate change will affect the earth and what will happen in the future. Even local weather forecasts are less reliable than most people realize. Therefore, attempting to predict the future stock or index movement based on technical analysis theory, by itself, is not reliable. As an example, many people still believe that the stock market or the economy has a 4-year cycle of trending up to trending down. 

This theory has been proven to be wrong. The theory is flawed due to the fact that it is based on expansions and recessions of the US economy over a period of over 100 years. Within that data, some expansions lasted less than 2 years, while others lasted more than 8 years. Averaging such inconsistent data resulted in an inaccurate assumption that there was a 4-year stock market cycle. This leads to many people losing money trading or investing in stocks.

The Index Chart below for the S&P500 shows the lack of a consistent 4-year cycle measuring by the trough to trough method used by expert cycle theorists.

  • The Index Chart: 

When using technical analysis, the approach must always be first, to use current technical analysis patterns and concepts, secondly, to avoid outdated and unproven, obsolete, or unsubstantiated theories.  

Thirdly, technical analysis is designed for studying near term, intermediate term, and/or long term patterns. Using the proper time frame for the goals of the investor or trader is crucial. 

Technical Analysis must also incorporate as much of the New Fundamental data as possible to provide a complete analysis of price action. 

Since over 80% of the market activity is institutional in the US, learning the new technical analysis that can track the larger fund activity helps retail investors, retail traders, small fund managers, and professionals make better buying and selling decisions. 

Below, the stock chart has price patterns over time, volume patterns, and quiet accumulation or distribution patterns that form with giant to large funds buying or selling the stock.

  •  Indicators & Technical Analysis:

A “stock indicator” is a formula derived from the data stream of transactions that occur in the various venues of the stock market. Price, Time, and Quantity along with the Stock Symbol and the buyer and seller are recorded every time a stock is bought or sold. 

Stock indicators are formulas written by mathematicians and/or technical analysts to obtain a specific indication or different analytical view of either price or quantity. 

Formulas for stock indicators can be as basic as a moving average, or as complicated as large lot versus smaller lot tick analysis. 

At least two pieces of data are required to create a stock indicator. Indicators can be applied to the price chart or graphed below price as seen on the chart above for Volume and Accumulation/Distribution Indicators.

The Simple Moving Average was the first “indicator” developed for stock analysis over 100 years ago. Today, there are over 250 indicators for stock, index, and market analysis. Choosing the right indicators for your investing or trading decisions is critical for success using technical analysis.

  • Watch Technical Analysis Training Video

  • Popular Indicators:

MACD, Stochastic, Wilder’s Relative Strength, Bollinger Bands Commodity Channel, Ichimoku Cloud & Moving Average, Average True Range & VWAP

  • Indicators, Leading & Hybrid:

Balance of Power, TT Quiet Accumulation, TT Volume Oscillator, Time Segmented Volume, Volume with adaptations & Rate of Change

It used to be that PRICE was considered the most important indicator for technical analysis. Therefore, most of the indicators written in the 20th century were based on price and time. However, with the dominance of the giant and larger funds which now use Dark Pool ATSs for their transactions, the importance of tracking not only volume but also quiet accumulation or distribution patterns has become imperative.

  • Dark Pools are Alternative Trading Systems:

Dark Pools are Alternative Trading Systems that were developed specifically for the largest mutual funds and pension funds to allow them to trade huge share lots over time without disturbing price. These giant lot investors buy stocks incrementally using automated orders that bracket price within a fairly narrow range.

Dark Pool buying creates bottoms; Dark Pool selling creates tops. However, these important market participants do not want to move price while they are accumulating a stock or while they are quietly selling a stock. That means that nearly ALL of the indicators written in the 20th century no longer work ideally for stock trading or investing.

This is a key factor in understanding the new technical analysis patterns for both price and volume. Without the awareness of where the most important investors in the market are buying or selling a stock, the smaller lot investors, retail traders, or smaller funds are at an extreme disadvantage. 

Most technical analysis theory was written decades ago and still is steeped in the outdate concepts that price is the most important aspect of the stock chart. Unfortunately, that is no longer the case. Quantity or share lot and volume are now far more important.

Another aspect of technical analysis that has changed dramatically is the intraday price action. Since the growth of High Frequency Trading Firms using millisecond trading platforms, intraday activity and technical patterns have altered dramatically. HFTs dominate the premarket and first few minutes of the trading day, altering technical patterns on the millisecond scale, which is unavailable to retail day traders. HFTs can and do alter price within the millisecond, often trading 1000 trades per second, or 60,000 trades per minute. The retail day trader or intraday trader only has access to minute by minute transactions due to their slower, less sophisticated computers, broker access, and retail analytical tools. 

Day trading for retail traders has higher risk than even a few years ago. HFTs use MACD, Stochastic, red light/green light trading systems and other popular indicators to track retail cluster orders which cause chronic losses for many retail traders. 

A few indicator writers recognized that the technical patterns were and are changing and wrote new indicators using all three pieces of data in a more complex formula that emphasized the importance of quantity to track the institutions.These indicators lead price & often provide more insightful technical analysis than the older indicators written decades ago.

Technical Analysis is not a static analytical tool, it is continually changing due to market structure changes, how market participants buy and sell stocks, who has what information, when that information is available to the general public and how the average investor or retail trader reacts to that news. All of these factors alter technical patterns slowly over time. Since 2008 technical analysis patterns have changed dramatically as new regulations, new high-speed transactions, new venues, new order types, and many other internal structural changes occurred. For the average person, most of the changes have gone unnoticed.

To be a successful investor or trader, learning technical analysis is essential. It is even more important and necessary to use in the modern electronic marketplace where 80% of all activity is dominated by the institutions. Using technical analysis enables the investor or retail trader to have an inside view of what is going on with the stock and its company and how the overall market participants feel about that stock and the company’s future.