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Trading Analysis

Types of Technical Trading Analysis

There are five main types of trading analysis used in technical analysis. These include scalping, day trading, momentum trading, swing trading, and position trading. In today’s article we briefly discuss what each type of trading is and how it is used in the stock market and other markets.

Scalping means to make hundreds or dozens or trades each while attempting to make a small profit from each trade through exploiting the bid-ask spread. Those that practice this type of stock trading are actually providing liquidity to the markets throughout the trading day. This type of trading believes that stocks go in a specific direction for a little while and their trades typically last between seconds to minutes. As you can imagine this type of stock technical analysis can add up to many transaction fees so it is very important that scalpers know what they are doing or they lose money in transaction fees alone.

Another type of trading analysis is day trading. Day trading stocks is when traders buy and sell stocks on the same day without holding any positions overnight. Day traders will hold their stocks minutes to hours rather than seconds to minutes like scalpers. This type of trading requires very strong discipline and keen knowledge of the stock market. Traders must have a trading plan and trading rules in place that they adhere to strictly or they risk trading emotionally and losing a lot of money.

Momentum trading happens when a stock trader identifies a stock that is breaking out. The means that the trader jumps on a trade at the beginning of the trend so that other buyers who come in a little bit later lift the stock even higher as they jump on the band-wagon.

Swing trading stocks is similar to day trading and scalping however swing traders will hold onto their stock for several days. Intra-day moves do not affect the swing trader as much as the day trader and swing trading is at its best when the market or stock is in a neutral trading range. This type of trading analysis is defined best as the ability to capture the short-term trend.

Position trading requires the holding of stocks for weeks to months. This type of trading is great for when the trader anticipates that the current trend will continue for a much longer term than a momentum or a swing trade. Position traders can make considerable gains and they have a lot of flexibility for trading if they cannot trade very frequently.

Continue to research and learn about the different styles of trading and as well as the different technical analysis tools available to investors. Decide which trading style works with your schedule and your personality so that you are successful.

Market Direction: Being able to analyze a trend is obviously an extremely valuable tool. Most technical methods do not incorporate the information found in candlestick signals. When this information is applied to trend analysis, the general market direction can be analyzed with a high degree of accuracy. Candlestick signals illustrate what is occurring in investor sentiment. When this information is applied to trend analysis, an investor can get a much better assessment of what the overall market trend is doing. The visual clarity built into candlestick analysis provides a much stronger trend evaluation technique than any other technical methods.

A candlestick buy signal occurring when stochastics are in oversold conditions usually provides the format for a trend reversal. But this set of parameters is more highly fine-tuned when adding the tee line to the analysis. There will be stocks that move up in a market downtrend. There will be stocks that go down in a market uptrend. But logic tells us that the probabilities are with an investor when they are trading stocks that are moving with the market trend. This is what makes accurate trend analysis so important. Assembling the correct combination of technical indicators provides a more highly accurate trend analysis program.

As illustrated in the Dow chart today, the possibility of a bottom reversal was in place. Both the Dow and the NASDAQ formed bullish Harami's two days ago. This occurred when stochastics showed oversold conditions. Yesterday's trading showed indecisive action between the bulls and the bears. This was not unusual during a bottoming action. A true reversal in the markets requires one more confirmation. Both the Dow and the NASDAQ needed to show bullish strength that would close the markets above the tee line. This looked like a good probability with the strength in the early morning trading on Thursday. But the charts clearly showed the tee line continuing to act as resistance. How does this information benefit a candlestick investor?


Not all trend reversals occur instantaneously. Sometimes a reversal requires two, three, or four days of chopping between the Bulls and Bears. That usually requires establishing and closing positions in rapid succession. There is nothing wrong with establishing a position when all the indicators show that it is time to buy. There is also nothing wrong with immediately closing out a position when the indicators show a failure. Today's markets showed the possibility of confirming candlestick buy signals in an oversold condition. However, before the end of the day, it became clear the bears were still in control. The tee line was still acting as resistance. The advantage of using candlestick signals is the simple rules associated with the signal. A specific result is required to confirm each signal. In keeping with the sage advice of cutting your losses short and letting your profits run, candlestick analysis provides a very simple visual format for keeping losses to a minimum.


An additional advantage of candlestick analysis is knowing how to use the extremely strong signals to our advantage. As illustrated in our recommendation of SCOR, the strength of the buy signal helps override the weakness in the markets. Why is this a benefit? Establishing a trade when the markets appear to be bottoming has the risk of backing off if the market, in general, does not confirm the bullish trend. The elements that made SCOR a strong buy allowed it to hold up even though the bullish sentiment in the markets disappeared. Yesterday's gap up in price, from the oversold conditions, above the tee line, forming an island reversal, made this a safe and viable trade. If the market continued to show strength going into the close today, the stock price probably would have acted extremely well. If the markets failed in producing a trend reversal, the strength of the signal in SCOR at least would maintain its price.


This may not seem like a very important concept, but establishing new positions when the 'possibility' of a trend reversal could be occurring requires strength needed to protect from a failure of a trend reversal. This helps maintain the equity of an account. Candlestick analysis utilizes the information built into each signal to minimize risk and maximize upside potential. This is not a difficult process to learn. The visual elements of candlestick signals provide an easy method to participate in strong price moves.

Chat session tonight at 8 PM ET - Everybody is welcome. We will be discussing how to analyze the strongest potential stock moves in the strongest sectors. Click here for instructions.

Good investing,

The Candlestick Forum Team

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