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Day Trading

Trading Stock Options With Darvas Box Theory

Nicolas Darvas was a dancer who invented a trading system while traveling the world, and made over $2,000,000 in about 18 months. Keep in mind: this was in the late 1950’s! In today’s dollars (at 5% annual compounding), he made over $20,000,000. That system, the Darvas box theory, relies on a very simple technical analysis idea.

The Darvas Box Theory

A Darvas box is an area of price consolidation wherein the stock treads over a long period of time. For example, imagine a set of toothpicks lined up in a row. Now, each toothpick is a different length, and represents the trading range for the stock in any given week. The idea behind the Darvas box is that when we line up all these toothpicks, we can easily draw a horizontal line at the top and the bottom of the toothpicks, which represents the support and resistance lines. Darvas’ premise is that when the stock breaks out above the top of the box, it triggered a buying opportunity.

Note that the Darvas method is not a day trading system. While it may be possible to use it as such, Darvas himself used weekly charts.

Why Use Stock Options

The beauty behind buying stock options is the limited risk and the leverage. The risk is limited only to the amount put into buying the options (that’s the obvious part). The not so obvious part is the leverage. When we buy an options contract, we are buying the right to control 100 shares of whatever stock the option is written on. In most cases, it costs much, much less money to hold the contract that the equivalent 100 shares. For example, 100 shares of Decker’s Outdoor would cost us almost $16,000 as of this writing. However, an at the money call option would only cost us $2,100. Yes that’s still a lot of money, but it’s only 1/8th of what we would have to pay otherwise.

Trading the Box Theory with Options

When Darvas was trading stocks, options were not available (options were not publicly traded until the 1970’s). In today’s world of financial innovation, we as investors can do almost anything so long as we are willing to pay. Such is the case with the Darvas method. With stock options, we can buy the right to profit from both sides of the stock movement by using the options strategy called a Straddle.

In a straddle, we buy a call and a put on the same underlying stock at the same strike price with the same expiration date. That way, it doesn’t really matter what the stock does. So long as it moves a lot in either direction during the period that the option is alive, we will make money.

One thing most people don’t think of when you buy a straddle: Once one leg is in the money and profitable, you can sell it and keep the other leg. That way, if the stock reverses course your worthless option is suddenly making you money again.

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Day Trading

Darvis Box Theory for E-Mini Trading

The original Darvis concept was a system for trading stocks developed in the 1950s by Nicholas Darvis, who had a unique career as a ballroom dancer of the highest order combined with a driving desire to be successful in the stock market. During my career I have seen this excellent indicator go in and out of favor with the retail trader. On the other hand, it is common to find Darvis boxes' on many of the charts the professional traders with whom I am acquainted. Why? When used properly this can be one of the most powerful real-time trading tools to possess. The problem is that many individuals tend to slap the indicator on their chart without researching and understanding some of the trade parameters, both positive and negative. If you understand how to trade the Darvis box it can be a powerful boost in your trading efficiency.

Even modern Darvis theory for stock trading is based upon the minimum of six months. So how did e- mini traders abscond with this rather mundane stock trading system and make it into a powerful trading tool? E-mini scalpers found that the indicator was fractal in nature, which is to say that it had similar results over varying time periods. The modern day trader of this indicator will be using an algorithmically different formula than Darvis could have imagined, but some of the original technique remains the same today.

Depending upon how you set the indicator settings, the indicator begins to form boxes around price clusters. The indicator tends to mirror near-term support and resistance and a break of an indicator line may indicate a breakout, if certain conditions are met. If the clusters form in a trending market this continuation pattern has a high probability of continuing in the direction of the original trend. An aggressive trader would buy at the lowest point of the channel; while a more conservative investor would buy when the price broke through the resistance line of that particular box.

Since I am not a systems based or mechanical-based trader, knowing near-term resistance and support and having a time-tested trading methodology to get an early start on a move in your desired direction can often add 10 ticks to an ordinary trade. If you add order flow software, and volume, you can closely monitor the trade direction by observing traders hit the bid and ask side of the contract.

There are scads of articles on the Internet and almost as many systems based upon the Darvis indicator for your perusal. To be sure, I developed my own set of rules after using this indicator for several years. This can be a versatile tool for your personal trading system and I highly recommend sampling some of the Darvis breakout and breakdown patterns so you can predict short-term market direction with reasonable accuracy. As always, best of luck in your trading.

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Day Trading

Stock Market Trading and Newton’s Laws of Motion

What new stock market investor should know?

We run a small stock market investment club and we educate all of new investors in our club using articles, software and stock market game. Currently, there is euphoria in the stock market and several people are investing money with some highly ambitious return of investment.

In this article, we will share with you some basic facts on stock market investment.

What is equity market?

Common stock is ownership of a company and sometimes it referred as shares, securities or equity. This means you are entitled to a portion of the company’s profits and any voting rights attached to the stock. The most common method for buying stocks is to use either full service or discount brokerage firm.

Why people invest in share market?

People invest in stock market for a possible high return for the entire duration of the company.

What are the risks of stock market investment?

However, your original investment is not guaranteed in share market. There is always the risk that the stock you invest in will decline in value, and you may lose your entire investment. As a stockholder, you will not receive money until the creditors, bondholders and preferred shareholders are paid.

How you can interpret Newton’s law to become better stock market trader?

Rule 1: “A Stock is not moving tends to stay at rest and a Trending Stock tends to stay in trend unless acted upon by an equal and opposite reaction or an unbalanced force.”

This means you should always trade in the direction of a trend. You should look for a force may take the form of a drastic change in the market sentiment or drastic change in the performance of the specific company.

Rule 2: “The acceleration of a stock as created by a market vote is directly proportional to the magnitude of that consensus, in the same direction as the agreement, and inversely proportional to the mass of the stock.”

This rule teaches us that a stock moves up or down into a trend due to a force created by market consensus. Movement of stock is determined by the price of stock and the amount of total agreement in market sentiment.

Stocks market is a zero sum game. In the realm of stock market investment we can interpret Newton’s third law as “for every buyer, there is a seller.” This is 3rd law of Stock market trading.

This means there cannot be more buyer than seller however there may be a very high or low demand for a particular stock.

Once you follow the Newton’s law of stock trading, you will under how easily you can invest in equity market and make good profit regularly irrespective of bull or bear market.

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Day Trading

What is Positional Trading Or Delivery Calls

People often ask questions on which style of trading is better, whether they should follow intra-day calls or positional calls and how they can make maximum profit with little risk in stock market. Based on the style of stock trading we can classify it into three types: Day, Swing and Positional. This classification is done on the basis of time frame of the completed trades and profit expectations. So, before understanding positional trading we should know something about day and swing trading. The difference between the three is defined below:

Day Trading: In this kind of trading the trader does not hold a position over night, he sells the shares on the same day he purchased them. This kind of trading is done keeping in view intra-day charts with a very short primary time frame like 3-minutes, 5-minutes, or 10-minutes. Their trade lasts from several minutes to several hours. Its better for those who can give full time to trading and want to earn regular income from the share market.

Swing Trading: In Swing trading traders either buy today and sell tomorrow (BTST) or sell today and buy tomorrow (STBT). This is done based upon daily stock charts and trades can last from a day up to several days or few weeks. This is better for those who can not give full time in trading but still want to earn from share market.

Positional Trading: This is better for those who are looking forward to create more wealth from stock market and do not want regular income from share market. In this kind of trading the trader has to see weekly chart and holding period of shares could last from 1 month to 6 months.

Thus based upon your trading style i.e., whether you want regular income or want to invest in share market to create wealth and the profit expectation you can select your trading style as day trading, swing trading or positional trading.

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Day Trading

Are Online Trading Courses Really Useful?

With the development and advancement of the internet you can get details and information quickly pertaining to any field. This can help you take well informed decisions faster and more efficiently. You can also learn about anything under the sun sitting in the comfort of your own homes.

This is also true when it comes to the field of learning the rudiments of stock market trading. You can undertake day trading education with the help of the online trading course which can help you to equip yourself in a better way so that you can benefit from the fluctuating nature of the stock market.

You can know everything there is to learn regarding day trading including scalp trading, futures stock trading etc. Internet provides essential and vital information not only to experienced or professional traders but also to novices in the field of day trading.

The online trading course may also help you in your pursuit of day trading education including candlesticks and candlestick patterns with the help of which you can take tour stock call options easily.

With the help of the online trading course those who are interested to know about a range of financial products such as stocks, futures and foreign exchange can gain knowledge easily.

The best advantage of day trading education through online learning courses are that they can be undertaken by inexperienced traders from anywhere around the world the only necessity being access to internet.
Learners can also have access to course materials and inputs 24 hours a day. This can help even a working person to learn about day trading if he / she is interested to learn about the same.

The online trading course not only provides comprehensive content but also expert advice from professionals in the field and reviewed periodicals. Also all the updates and changes will be made automatically which you can see in your next upload. In this way learners can keep themselves abreast in the field which can greatly influence their trading education.

Learners can also have a better understanding of the fluctuating stock market because the courses may have up-to-the-minute price fluctuations integrated into it. In this way the online course can be a practical method of learning. Learners can also have hands on education because they can get the rare opportunity to practice trading online without having to make any investment.

It is more like an educational game and with practical inputs learners can gain all the inputs they need to master online trading. Learners can also explore various investment strategies which will help them make a deal when they practically start trading in the live market with real currency.

In spite of these merits, you may have to exercise caution while selecting an online trading course. This is because there may be many scams involved and doing some research can help you select the right course.

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Day Trading

Here’s An Extra Important Article To Read If You Want To Make Money Trading Stocks

You would probably be shocked if you knew just how often I have encountered this question! Of course it makes sense that people are searching for the surest way to profit from the stock market, after all who wouldn’t want a bit of extra money! Let’s have a look at the smartest way to make money in the stock market.

Earning money from investments is a powerful thing. You’re putting your cash to work and making money-wise decisions to make it grow. Wow, what a thrill!

Naturally, there’s no guaranteed rule to gain riches overnight. Nothing’s quite that easy. But, with a bit of thought and research, you too can determine how to invest for maximum profit.

In this article, I will share with you what I know to give you the best chance achieving your financial goals in the stock market. If you know how many hours you can allot to manage your investments, it’s not too hard to turn a profit.

Do you have a few hours on a daily basis or only an hour every week? Often investors don’t really calculate the hours they need for meeting their investment goals, and because of that they opt for the wrong investment tactic for them.

If your available time is severely limited, being a day trader won’t be an option. If you don’t closely watch what the market does, you can’t position your investments for maximum profit. So often a day trader forfeits money because of time constraints!

Day trading isn’t the only way to invest for profit! Day trading is one of the more involved ways to invest, and it’s not for everybody. Good knowing then, that you can turn a profit in other ways.

I believe a large number of investors would be better off not making strategic positioning every day. I’m not suggesting you completely ignore your stock positions for long periods of time. You just should have on a position that you are satisfied with during the day.

Schedule time for your stock market investments periodically daily, weekly, monthly, however it works with your schedule. This time is to analyze the market and make selections of stocks based on current economic events and future predictions. Seek and you shall find good opportunities.

Another tip is to focus on specializing in a certain area. This may mean that you just focus on annuities. Or perhaps you would rather focus on a specific industry. Specialization is an investment style that can be customized to your schedule and your interests.

The best way to earn a profit in the stock market is the strategy that suits you! If you learn any lesson from this article, I hope it’s the certainty that you have to pick your investment tactic based on how much time you can commit. If you customize your investment strategy and modify it as your circumstance dictates, you are in the strongest position for maximum profit potential.

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Day Trading

All About Share Market Trading

What are shares?

It’s a means to own a company.

The definition of ‘Securities’ as per the Securities Contracts Regulation Act (SCRA), 1956, includes instruments such as shares, bonds, stocks or other marketable securities of similar nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities, security receipt or any other instruments so declared by the Central Government.

What is Share Trading?

Shares trading refer to buying and selling of company shares – or any derivative products based on company stock – with the motive of profit earning.

Prerequisites for Share Trading

• We need to have DP(DEPOSITORY PARTICIPANT) account.

• We need to have a Trading account

• And of course money

How Trading Happens?

Companies get themselves listed on popular stock exchanges like NSE, BSE

Interested traders using terminal provided by their brokers trade on those shares.

Online Trading participants

• Investor- Participates through website of brokerage using internet and computer.

• Brokers- they contact each other through trading terminals and they also find who is interested to buy or sell shares.

• Stock exchange- It facilitates transactions through its servers. Most dominant stock exchange in India are NSE and BSE

• Registrar of Company-It is a government body that maintains records of all shareholders and updates database changes whenever ownership changes.

• Depositories- It includes depository participants which stores shares in electronic format.

• SEBI (Securities Exchange Board of India)- SEBI is a government body which regulates financial markets and looks into Investor complaints against companies.

Kinds of Trading

Intraday trading

Delivery based trading

Intraday Trading

Intraday trading includes buying and selling of stocks within the same trading day. The stocks purchased in this kind of trading, are not purchased with an intention to invest, but for the purpose of earning profits by analysing the movement of stock indices.

Deliver based Trading

Delivery based trading means buying shares and holding them for certain period of time is called delivery based trading.

In this method you have to place your buying request through your broker and pay for the current price of the stock. Once your request is executed the stocks that you have bought are deposited to your DP account. In this process you have to pay the full amount of the stock price. Once the stocks are deposited to your account you can then sell the stocks or hold them for as long as you want.

The delivery based trading at the cash segment is the simplest way of trading and the risk is comparatively lower.

The biggest advantage of delivery based trading is that you do not have any time limit for selling the stocks. But the disadvantage of delivery based trading is that you have to pay for full price of the stock and the brokerage is higher than other forms of investments.

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Day Trading

Learn Stock Trading – A Sensible Approach

David Jenyns, a successful trader in his own right, interviews long-term trader and friend Stuart McPhee about the need to learn stock trading if your time is limited, and how to start out as a trader.

Stuart: A questioner has asked what is the best to trade if you are time poor. There are methodologies you can use that really don’t demand a huge amount of your time and the obvious one is trading stocks using medium-term trends.

In fact you don’t even have to check things every day. You don’t need to scan every day. My medium term funds I scan once a week. Admittedly when I’m in a trade, I’ll monitor during the week. So far as scanning and identifying new opportunities, it’s a once a week thing. I think a lot of people scoff at oh, only a few hours a week or one hour per day or less than an hour per day.

Absolutely you can trade using a particular style that doesn’t demand a huge amount of your time. Trading stocks medium term trends is certainly one of those and is the most obvious and common one for people who are time poor.

David: I think a lot of people are facing this. The next question is: I’m a beginner in trading and I started trading the forex about six months ago. In one of your videos, you recommended for beginners not to start with short term trading such as intra day trading. For a person like me who has a full-time very demanding managerial job with the aim to trade on a part-time basis as a starting point, what type of trade would you recommend: forex, futures, stocks etc? What type of trading, swing trading position trading and can you specify timeframes, medium term or longer term?

Stuart: There may be people out there who start trading foreign exchange straightaway and make a killing. I just know that’s going to be the exception rather than the rule, and it’s going to be a very rare exception. I really believe in laying the foundations. The groundwork for me is to learn stock trading for a period of time and just concentrate on trading stocks. They are the easiest, you won’t get hurt if things don’t go your way. You’re not trading with leverage, you can’t lose more than you physically have, where with some of the other products you can.

It’s just the easiest way to start, it’s a great grounding and then if you can’t trade stocks profitably consistently, then you’re certainly not going to be successful trading the others. That’s why I believe in starting with the basics.

When you have a demanding job time wise and trading such a short term instrument as forex, it’s difficult. The beauty today is you can place conditional orders and place our stops physically as soon as we get in so we don’t have to watching the screen but I think so far as analysis is concerned and doing other things it can be demanding of our time.

David: He also asked regarding swing trading and position trading or a particular method of trading. If you were to put a label on it so he’s got somewhere to start.

Stuart: Yes I just say learn stock trading using medium term trends. Analyze peaks and troughs. Identify those and those stocks achieving higher peaks, higher troughs, that’s the sort of thing I’m interested in. Good solid conservative, medium term steady sort of movement stocks.

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Day Trading

Finding Hot Stock Markets to Heat Up Your Trading Portfolio

UNCONVENTIONAL STYLE OF TRADING STOCKS:

We do not like day trading stocks, but we are short term traders and we DO like to hit and run in the US stock market. We like to get into positions when they are moving and then get out in two or three days. We think this is a highly effective way to trade and combines safety with very high yields.

But to do this we use a very unconventional style of trading. We set up a very large group of markets, currently 96, limit our commitment to each market to about $1,000 and then take mechanical trading signals from a trading system we have programmed and have traded with real money for many years. We use a custom trading platform that interfaces with live streaming data from E-signal. We sit in front of a computer for six and a half hours per trading day and we typically take 10 to 30 trades a day.

IDENTIFICATION OF VOLATILE MARKETS:

But because we take so many trades and are only in trades for two or three days our methods will not work in dead markets. Our methods require that we identify volatile markets.

Identifying good volatile markets can be a little tricky. At one time I used a simple form of back testing to do this. I would grab a market, get a couple months of tick data for that market and then apply our trading system and look at the results. If the results looked good I would put the market into my portfolio and if the results looked bad I would discard the market.

The results of this method could be disappointing. A market that had made good money for 8 weeks might produce a string of two or three losing trades just as I was putting real money on it and the market that I had discarded might start making money.

What I soon realized was that this approach was really a form of optimization that was, in effect, trying to predict future trading system performance by trying to fit a system to a given set of data. It was a form of “curve fitting” and curve fitting is the worst thing you can do to identify profitable trading. This simply was not a good approach.

But what I realized when working with market data was that the critical factors for identifying profitable markets was volatility and follow through.

I then investigated some commercial software that allowed the user to scan large numbers of markets and enter certain criteria to identify markets that met those certain criteria. I did find this commercial software helpful for identifying volatile markets but the results were nevertheless not as satisfactory as I had hoped for.

The problem was that most commercial software uses range over a period of time to determine volatility. The problem was that sometimes that range took place in a single day and the rest of the time the market was dead.

I will give you an example of a market with a lot of volatility for two days but that was nevertheless a waste of time to trade the rest of the time. On 12/16/09 there was some breaking news on DCGN, deCode Genetics, and the market exploded and put in a range from 6 cents to over 30 cents, quadrupling its value in a single day. That is volatility! One day this market was at the top of the list for market gainers and on the next day it was on top of the list for market decliners, up and then down in two days. As I write this on 1/10/10 DCGN is back to where it started before the news and is as flat as a pancake. But if you run a volatility scan on all stocks for December 2009 DCGN will probably top the list. And yet it was but a one day wonder and outside that one day it would be pointless to keep it in a trading portfolio.

This kind of market movement is not unusual and it creates problems for identifying good markets to trade. Software that uses range over a period of time does not filter out this kind of market.

After some experimentation I hit on a solution to this problem which I will share here. What I did was to develop a program that could scan a stream of data and identify the characteristics that typically work well with our unconventional trading methods.

The markets that worked best with our trading methodology were markets that had repeated expanding, volatile break outs with follow through for a day or two. After an expansion of range the market might contract for a few days but this contraction might then be followed by another expansion and then some more follow through.

DUMMY DAY TRADING SYSTEM

To identify such markets I programmed a dummy day trading system. We do not day trade and I am NOT recommending day trading or this system for actual trading. But to identify good break out markets for our methodology I set up the following simple rules for the dummy day trading system:

1) The “system” uses our proprietary programming method for determining the number of contracts traded and limits the size of our positions to approximately $1,000 per position taken. In the world of stock trading this might be considered a tiny position. We do this to allow us to trade a large number of markets with a small amount of money. We currently trade 96 markets and by doing so we protect our trading equity through diversification. Hence we will buy 1000 shares of a stock selling at 98 cents per share but only 100 shares of a stock selling at $10.02 per share.

2) After the close on a given day the DUMMY SYSTEM determines the range for that day. It then calculates 25% of that range and adds that value to the market close to determine a buy point for the next day. Hence virtually any kind of significant upside move the following day will result in the dummy system buying the market. Typically the dummy system will get a buy signal about every other day and show around ten trades for every 20 trading days or so.

3) A day of entry stop is immediately entered when a position is taken. Using 15 minute bar data this stop will exit a market if it retraces its move more than 75% from the last intra-day high. This stop is rarely hit.

4) All positions are closed out on the close of the trading day.

This dummy system is really just a screening device. This is partial results from a GOOD MARKET, BIOF, which was tested on intra-day data for eight weeks from 11/09/2009 through 1/08/10:

BIOF BioFuel Energy Corp. (NASDAQ) 15 min bars 11/09/09 – 1/08/10

Total Net Profit = $552

Number Trades = 17

Wins = 10 (59%)

Average profit per trade (wins and losses) = $32.49

This is partial results from a BAD MARKET, ARBA, which was also tested on Intra-day data for eight weeks from 11/09/2009 through 1/08/10:

ARBA Ariba, Inc. (Public, NASDAQ) 15 min bars 11/09/09 – 1/08/10

Total Net Profit = $44

Number Trades = 19

Wins = 12 (63%)

Average profit per trade (wins and losses) = $2.32

When you look at the three month charts of these markets you may be inclined to believe that both markets are volatile and would be good markets to trade. Conventional methods of determining volatility will probably show that both markets are indeed volatile. But when we apply the dummy system to the 15 minute charts the difference between these markets becomes apparent.

The bottom line is that BIOF is a great market for our methods, but we are wasting our time with ARBA. The problem is that ARBA is simply not volatile enough to overcome our transaction costs when trading our relatively small positions. For this reason we must reject this market.

As a rule of thumb when I scan markets with the dummy system I like to see the average trade (win loss) over $10. If the average trade is less than $10 I reject the market for use in our portfolio.

I have found that this method of market selection for identifying “hot markets” for short term trading to be superior to other methods, commercial or otherwise. I have found that markets that show an average trade greater than $10 using the dummy system will usually show excellent real time profits trading our short term trading methods.

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Day Trading

Swing Trading Stocks – An Introductory Guide to Swing Trading Stocks

Swing trading stocks has become increasingly popular among home-based investors and beginning swing traders. You can make money from swing trading and the most common way is by mastering it. The more skilled you are, higher are your chances to succeed.

But you have to start somewhere, right? Because of this, we need to clarify persistent misconceptions and give you the right tools for you to start. With experience and training, you’ll come up with your own stock swing trading system.

What is swing trading?

What is swing trading?. Many people confuse swing trading, day trading and buy-and-hold investing. The fact is they are quite different at several levels.

Put it simple, swing trading is to profit from securities’ price movements which, comparatively to day trading or buy-and-hold investing, span a few days to a few weeks — one or two months, at most.

In day trading, securities’ price movements span only one day and traders don’t hold any positions overnight.

What are stocks?

Most of the time stocks take the form of shares of ownership in a corporation. There are two types of stock : common stock and preferred stock.

Common stocks are voting shares which are giving the stockholder the right to vote on matters of the company.

Preferred stocks are a bit different than voting shares in that they don’t carry voting rights. However, they carry priorities over common stocks in the payment of dividends.

That being said, there is a whole lot more to say on the subject so I encourage you to further read about the stock market.

How to swing trading stock

Swing traders rely heavily on different strategies to uncover new opportunities they can profit from. Their choice in regards of strategies largely depends on their temperament and  their approach of markets. There are two main strategies swing traders can use : fundamental analysis and technical analysis.

Understanding fundamental analysis

To easiest way to understand what fundamental analysis is, it’s by identifying common questions fundamentalist constantly ask before entering a position.

  • Does the company’s value has increased or decreased comparatively to its peers?
  • What’s its growth rate? Is it worth the investment?
  • What are its return on capital and debt levels?

By constantly posing these questions the fundamental analyst can get an idea on the price of the company’s shares and make appropriate choice based on that

Understanding technical analysis

Technical analysts are skilled in reading a security’ s price chart with volume to accurately determine the likely direction of that security. The technical analyst estimates the direction of a security by analyzing the strength of buyers and sellers on the markets.

Adopting this approach means doing extensive analysis of chart patterns and indicators.

Which one to choose

Most experts agree to say that both strategies should be used in conjunction. Indeed, they complement each other and together, they ensure an throughout analysis of the company’s position on the markets.