Hello Fellow ChartWatchers!
As I travel around the country talking to various investment groups, I always make a point to remind everyone about the what I call "The Technical Process" - the steps that every investor goes through before taking a position in a stock. Some people get so caught up in the details of this process that they lose track of the "big picture" so I created this diagram to help re-focus people:
The goal of any serious investor is to continually develop a set of signals that they trust and then use prudent money-management techniques to limit losses and profit from gains.
In this context a "signal" is anything that causes you to consider buying a particular stock. It could be a mention in a newspaper, a technical indicator crossing some value, a broker recommendation, a "hot tip" from a neighbor, etc. Regardless of the source of the signal, the first thing everyone has to ask themselves is "Do I trust this signal and if so, why?"
Technicians work to develop well-defined, objective, repeatable signals based primarily on price and volume data. Such "Technical Signals" can then be analyzed, reviewed and evaluated to see if the stocks that they select meet the technician's goals. The process is not easy. It requires a fair amount of time and dedication. It never really ends either since good technicians are always looking to improve their results. But the process is very worthwhile in the long run and the diagram above should help you stay on track.
Some people skip the "Research, Study, Plan" phase almost entirely while other people never leave it. Our ChartSchool area is a great place to start and our bookstore contains many more sources of information. But remember, while learning about technical indicators and trading strategies is very important, there is only so much one can learn by reading. In order to truly understand how fear and greed drive markets, you need to combine research with participation.
Selecting signals is a combination of science and art. Again, there are no 100% accurate signals and signals that work for one person may not fit with someone else. My strong advice is to start simple and build up over time. When in doubt, start with a simple MACD Crossover signal and build from there.
Our ScanEngine can help you see how many stocks meet your current signal criteria. The goal is to create a scan that returns a "manageable" number of stocks - anywhere from 2 to 50+ depending on your tolerance for chart analysis. If your scan returns too many stocks, consider adding price and/or volume constraints to reduce the number of results. If your scan returns zero results, remove clauses one-at-a-time until a non-zero number of results appear.
Learning to create and run technical scans effectively is crucial to your success as a technical investor. Unfortunately it can take time to learn the ins and outs of scanning but again, the rewards are well worth the time and effort needed.
Once your scan returns a reasonable number of results, you should then review the chart of each result carefully to see if it is the kind of stock you'd be interested in buying. If all of the stocks look "wrong" to you, you should probably start the process over again with a different signal. If most of them look good but a couple are odd-balls, just delete the odd-balls and keep going. As the lines show, this is an iterative learning process that takes time.
The steps for placing your trade, monitoring it and managing your risk - collectively known as the "mechanics of trading" - are something that other people have covered extensively so I won't go into it in this article except to say that money/risk management is another required skill for technical traders.
The last bubble on the chart says "Evaluate Trade." Implied in that phrase is that you maintain and review a trading journal. It could be as simple as a pad of paper and a pencil or as complex as a private database. Regardless, note down the reasons for entering your trade, the expectations for the trade, the ultimate results and lessons learned. Use your journal to improve your research as you start the entire technical process again. Over time, your trust in your signals will increase and your results will improve.
Remember, for successful investors, this process never ends.