Tradings Most Difficult and Profitable Skill- Forecasting Trends
Technical analysis focuses on chart forecasting techniques that offer the astute analyst the ability to forecast stock market trend changes. Chart reading is part art, part science because two different technicians can read the same chart differently. However, there are certain methods that have shown accuracy for detecting trend changes and have become foundational for traders.
Tracking Volume for Predicting Stock Markets
Volume refers to the number of trades in a market along with the number of traders involved. When a market rises on increasing volume, then the market trend has strength. A market rising on decreasing volume means the market has begun running out of willing buyers. Stock or commodities markets rising on decreasing volume or falling on decreasing volume are primed for a trend reversal.
Over 6.85 billion shares trade daily between the major U.S. markets of the NYSE, Bats, and Direct Edge. Much of this trading volume comes from computerized trading, while private investors represent a smaller portion every year. Even so, the volume trends indicate what the professionals and the institutional investors are doing with their marginal funds, along with the small investors voting for or against a market move.
Tracking Inter-market Stock and Commodity Market Relationships
Stock markets generally rise when bond yields fall. When commodities rise in value, companies using commodities generally lose profits because of higher costs often resulting in their stock price falling.
Gold and oil will often track together, along with silver. Most commodities move opposite the value of the U.S. dollar as stated by the USDX. If these age old inter-market relationships fail or no longer hold, then there is often a trend change ahead.
During Q1 of 2008 gold, oil, stock markets world-wide, and the commodity markets were all moving together. This was a rare and challenging time because generally the commodity markets fight stock markets. All markets were rising in tandem. The Federal Reserve central bank was printing huge quantities of dollars and providing them through low or no cost loans to the Wall Street banks. This liquidity sent all markets higher.
When the Fed pulled the liquidity plug, called loans, set up short positions in the commodities markets, and collapsed Lehman Brothers, the markets folded in unison. Trend analysis tracking inter-market relationships showed this was a rally doomed to fail, just as it did.
Options and Futures Trading Based on Trend Change Indicators
Forecasting market trend changes can result in the highest possible returns for a given market move. Because technical analysis is imperfect, risking the smallest percentage of investment funds on each trade is the appropriate tactic. Options and futures are two vehicles that can land big fish returns, while risking a small part of a portfolio. Futures are only for the advanced trader. Options are for every investor once the basic principles and risks are clearly understood.
After applying these trend forecasting techniques, the average investor can become the well-above average investor that earns a very good living from this knowledge.