Technical Analysis

As I have mentioned before, a stock should not be held for more than one day unless the investor performs a complete fundamental analysis on the stock (which is beyond the scope of this website). On the other hand, if a person is planning to get rid of all his or her stock positions before the trading day is over, then the most important skill to learn is technical analysis. Technical analysis takes a look at past stock prices (in the form of a chart) to try to determine what is likely to happen next to the price of the stock. The reason why technical analysis works is because a lot people use it. Technical analysis can be applied using the KISS (keep it simple students) principle or it can be complicated beyond belief with advanced mathematics and calculations. Despite the fact that I have a B.S. Degree in Electrical Engineering, and Engineers love math, I must admit that using complicated math in the stock marker is a waste of time for most people. This is my honest opinion. For that reason, the technical analysis I use is very simple and it is based on the concepts of trading around "support" and "resistance" and basic (high-probability) patterns. Furthermore, the simpler something is, the easier it can be mastered. To succeed, a day trader must have the complete control and mental security that comes with complete mastery his trading system.

In technical analysis, "support" is a price level in a chart where a stock bounces up from. Generally, demand (buying pressure) overtakes supply (selling pressure) at a stock's support level causing the stock to go up. "Resistance" is the other way around. When a stock is rising, eventually it reaches a price level from which it is repelled. Simply put, supply outweighs demand and the stock tends to fall in price. A simple example of this is provided below using a 3-month daily chart of McDonald's Corporation (ticker symbol MCD):

Notice that during the last three months McDonald's stock has been repelled (downward pressure) when its price price has gotten close to 27.50, and that the stock has bounced from a support level near 25.50 more than once. Notice that the stock did not go perfectly up to the 27.50 level or down to the 25.50 level. That's because technical analysis is not perfect. Once you have enough practice, you will be better prepared to make logical decisions based on it.

To perform a complete technical analysis of a stock, the trader usually looks at a chart of the last several years, then at a one-year chart, then at a six-month chart, then at a one-month chart, then at a chart covering several days, and finally at a chart of the current trading day, known as an "intraday chart". By doing this, the trader will get an idea as to where the critical levels in price are that might represent resistance or support for the stock. The system or methodology that the trader uses should then take advantage of these critical levels. During day trading training sessions I give, I discuss specific ways to take advantage of these concepts.

So once you learn how to read and use level II, how the mayor electronic communication networks (ECNs) work, how to trade against the market makers, where to send your order (order routing), and how to use technical analysis to trade stocks, you will be prepared to take on day trading stocks as a business.