Retail trading sometimes doesn't want to cling to the basics of the stock market. However, popular technical analysis tools can be used in other ways, maybe not entirely as intended, but still effective. In the article we will focus on well-known indicators: moving averages, Fibonacci retracements, as well as divergence and convergence, to turn them into useful elements to facilitate the game on the stock market.
Table of Contents
In the original Fibonacci retracement, they determine the levels to which the price returns after the impulse, so that you can open a position according to the trend, at the most favorable price. To calculate the levels, the famous Fibonacci sequence was used, in which each subsequent number of the string is the sum of the two previous ones. Another interesting fact is that he divides two consecutive numbers in it, which results in a result gradually approaching the golden ratio.
However, there is a problem, there are several Fibonacci levels, and we do not know which one the price will react with. In the real world, stock market forecasts created with their use are usually completely wrong.
In any case, there are also cases in which the reflection actually occurs, which pleases mainly supporters of this tool. Its popularity, however, is so high that it is probably equipped with all stock market applications.
Divergence and convergence
The classic edition of trading using divergence and convergence uses a simple technical indicator RSI (Relative Strenght Index). When the price of an instrument increases, the RSI does not reflect this behavior by moving in the opposite direction. Then we are dealing with a signal to open a long position. Convergence is a situation where the RSI indicator is in an upward trend and the instrument is in a sell-off phase. This is a suggestion that there has been market manipulation and trend reversal.
Not too many people know that the phenomenon of dispersion between the technical indicator and the price can be seen with the help of the Japanese candlestick chart,which instead of reflecting the real price movement, illustrate the involvement of buyers and sellers – Delta. In this case, we can get a reliable signal to open a position, while most of the market sells off their positions and heavier orders absorb them by directing the rate upwards.
Unfortunately, not every stock exchange platform allows you to use Delta-based charts. In the case of popular platforms, however, you can look for free indicators that use the delta in their calculations.
Reading the basics of the stock market, we will certainly meet strategies that use the intersections of two moving averages as signals to open a position or leave the market. Even simpler proposals may assume the use of one average, which acts as a baseline, determining the direction of the current trend. Such trading methods are very popular, however, due to the very delayed signals, they are not characterized by very high efficiency.
An alternative to using the moving average as a trend indicator, where it can be used as a target to scalping short-term trades. By receiving a certain signal from the price to, for example, a correction in an upward trend, it will be possible to set a take profit order on a moving average. If you do not want to take additional risks related to trading against the main trend, you can wait for the return to the average and buy, in line with the prevailing market trend.
It is best to start with a demo game on the stock exchange
Even critical thinking with the creative use of the above techniques does not guarantee positive results. Playing the stock market is a huge risk, especially when using inaccurately tested systems and poor budget management. Starting the adventure with the financial markets should start with an exchange simulator, allowing us to make mistakes without losing real funds.