subject: What is a Trading Edge and How to Get One by:Chris Strudwick [print this page] One of things that comes with experience is a trading edge. If you are unable to develop a good trading edge over the other traders, you could end up losing all of your capital, even if you are very disciplined and organised.
In this article I will cover some pertinent factors that I quite often use in achieving my own personal trading edge.
Fundamental Analysis.
Fundamental analysis as we all know by now, is the best method of checking out the financial condition of a company. This is easily accomplished by using financial reports, price/earning ratios, incomes, market share, sales and growth, etc.that are available This type of analysis can be very time consuming but I find it well worthwhile the effort that I put into it.
Here are a few factors that I take into consideration when researching a potential stock.
1. Earnings Per Share (EPS) .This shows me the stocks average short term (recent quarters) and long term (last three years) earnings growth rate actually is.
2. Relative Price Strength (RPS) This measures a stocks relative price change in the last 12 months in comparison to other equities Iin the Stock market.
3. Sales + Profit Margins + ROE (Return on Equity). This shows you a company's sales growth rate during the last 3 quarters, before and after profit margins and the return on equity.
If you like the idea of including fundamental analysis into your own trading plan, I would consider trading only stocks that meet some of the basic minimum requirements.
I personally like to use fundamental ratings for longer term trades such as the ones I plan on weekly charts. This won't be of much help to you if you happen to trade intraday.
Fundamental analysis can be a phenomenal way to build up a list of good solid potential profitable stocks, or as an alternative you can utilise it as a way to filter out the weaker stocks, but thats about its boundaries. It will not provide you with an objective method to either enter or exit your trades. All of my trading decisions (entry, exit, and stops) are all based on technical analysis. Which we will now take a closer look at below.
Technical Analysis.
Technical analysis is basically all about the analysis of prices and their behaviour. These price actions depict patterns on charts and because human behavior is notoriously repetitive in nature, these price patterns can also be seen as very repetitive as well. By being aware of this important element definitely puts the odds in our favour right from the start.
You can choose from a variety of chart types that are readily available. The Japanese candlestick charts I have found by far are the easiest to utilise and could quite possibly be the one chart that you will use the most.
There are entire books devoted to the study of these candlestick patterns - if you are really serious about studying candlestick charts, Just take a look at the free books available on www asxnewbie.com.
Support and Resistance:
This is one of the most important concepts in technical analysis. Support and Resistance forms the very basic foundation for nearly every trading decision you will make. To give it full coverage would require many pages but I will limit myself to some very basic definitions and just a couple examples:
Support level:
This is a price level that a declining market or stock has failed to penetrate and has rebounded off at this level.
Example: the low of the previous day forms an line of support and this price level is often frequently used as a stop loss.
Resistance level:
This is a price level that a rising market or stock has failed to break through and has rebounded off it and headed back downwards.
Example: a previous high in an uptrend forms an area of resistance and this can be used as a minimum future objective to take some profits once that level is eventually reached.
Oscillators:
An oscillator is a technical indicator that will tell you at a quick glance whether a market or a stock that is currently being traded has been either "overbought" or "oversold." A few traders often use these oscillators to forecast a future change in direction. Some of these examples include the RSI, Stochastic Oscillator, and MACD just to name a few.
There are many numerous oscillators and technical indicators that traders employ, but I personally like to utilise them to weed out the weaker stocks. Particularly if I am lucky enough to have accumulated a list of too many good stocks to choose from. A very nice position to be in.
There are other indicators that I also use from time to time.
I look for support and resistance on the VIX (Volatility Index) daily chart to assist me to foresee reversals.
I look at the Put/Call Ratio (5 MA and 10 MA) on the daily chart to see if traders are too bearish (MAs > 0.8) or too bullish (MAs 1.2).
I also look at the McClellan Oscillator the market is overbought if it rises above +70 and oversold if drops below -70. A buy signal is generated if it falls into the oversold area (-70 to -100) and then turns up - a sell signal is generated if it rises into the overbought area (+70 to +100) and then turns down. If it goes beyond the -100/+100 levels then it may be a sign of continuation of the current trend.
This article has not really been about about teaching you how to develop that trading edge. The idea that I had in mind was that it has hopefully shown you that there are many various and excellent tools available that can be used to improve your trading odds and increase your profitability.
It will take time and effort to find the right combination that will fit your trading personality and your own trading techniques. With persistence you can hone your trading skills to a level that gives you that vital edge over the average trader. If by chance that happens then my goal has been achieved.
I wish you profitable trading.
About the author
Chris Strudwick is a successful share trader on the Australian Stock Market Visit his weblogs at both http://www.asxnewbie.com AND http://www.aussie-retiree.com/ for more free articles and useful information about the stock market.
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