5.1 Technical Trading Strategies

Strategies for technical trading and day trading.
 
 
Technical trading strategies are based on the technical analysis of the price movement. We have seen that technical analysis is nothing but the analysis of the current price-action with reference to the past price movements. 
 
As we have seen that is that this analysis is done in three ways:
 
  1. Direct Approach i.e. analysis of the price action directly.
  2.  

  3. Indirect approach i.e. Analysis based on technical indicators which in turn are based on the price-action.
  4.  

  5. Combination of the above two.
 

1. Direct Approach i.e. analysis of the price action directly

 
Any trading strategies based on the direct analysis of the price action are mainly about the visual facts or patterns. These involve the following:
 
 
The strategies about entry and exits based on all these have been covered in the respective chapters bt for the ready reference these include the following:
 
  • Entry and exit based on supports and resistances.
  •  

  • Breakout trades
  •  

  • Trading with trend continuation, when the trend resumes after a correction.
  •  

  • Trading with trend reversals or major corrections.
 

2. Indirect approach i.e. Analysis based on technical indicators

 
Technical indicators help us in identifying support & resistance zones, trend strength and trend reversal possibilities and thus help us in identifying possible entry and exit points or zones. The trading strategies based on the indicators are based on the following basis:
 
  • Entry and exit based on dynamic supports and resistances.
  •  

  • Entry and exits based on crossovers.
  •  

  • Entry and exits based on overbought and oversold market situations.
 

3. Combination of the above two approaches

 
Use of the combination of technical indicators and price movement itself happens in two ways which are as follows:
 
  • Type of indicator
  •  

  • Complementing technical indicators with visual indicators like chart patterns, candlestick patterns, trend lines and support & resistance zones etc.
  •  

  • Using Divergences

 

Type of indicators

 
There are some indicators which directly interact with price-action and hence the combination of the indicator and price-movement is automatic and unavoidable. Examples of such indicators are Bollinger bands and Parabolic SAR. 
 

Complementing technical indicators with visual indicators

 
It is always good to keep an eye on the various visual signs to see if there is something in the price-movement which is backing the signal received by the indicator you are using. You may check some examples at Indicators Put Together – The Complementary Approach.
 

Using Divergences

 
We have covered some example of trading with divergences in the chapters about Stochastic oscillator, MACD Histogram and Relative Strength Index etc but we will talk more about it under this section.
 

To summarize, many of the trading strategies have been discussed under various lessons about technical indicators, chart patterns, candlestick patterns and harmonic price patterns etc but some we will talk about some of those in more details and will cover some more important points under this section.

 

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  • Overview of Technical Trading Strategies

 

 

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