Check Out the Market Trend - 6 Tips to Make A Better Trade

Posted: 05 Mar 2008 | Categories: Stocks Mutual Funds

When I first traded stocks, I spent so much time searching for the best stock to buy. I then realized that a good quality stock is not the only thing that makes you profit. It is very important to time your entry.

Timing added a lot to your success rate as when the market is in a correction, generally three out of four stocks will go down along with the market. Therefore, before making your entry, check out first where the market is heading.

1. Check the long term trend. Look over the past three to five years to find if the market in general is in a bullish or bearish trend. Usually the market will go through some consolidation period before turning from a bullish to a bearish state or vice versa.

2. Draw a line to recognize the support and resistance levels. The more the line is touched, the more important it becomes as a support or resistance levels. An uptrend is indicated by higher highs and higher lows. A downtrend is indicated by lower highs and lower lows.

3. Check the Moving Average (MA). MA is one of the frequently used technical indicators and works best on a trending market. Price that crosses up the MA is a bullish sign and price that crosses down the MA is a bearish sign. The most widely used MAs are the 20 MA and 40 MA.

4. ADX line. ADX is another indicator that could be used to tell a market trend. ADX moving up to 20-30 level indicates a trending market. When ADX is below the 20-30 level, the market is usually in a trading range.

5. Relative Strength Index (RSI). The mostly used marks on RSI are 30 and 70. The price going above 70 generally signals an overbought situation while the price going down below 30 shows an oversold situation.

6. Volume. A solid uptrend or downtrend should be coupled with increasing volume. Beware if the price is going higher but the volume is low. That could be a sign that the market is losing energy to support its uptrend.

Please note that technical indicators can not be used independently. They are built based on historical data and are lagging in nature. However, when used together with other tools, they could be useful to predict the market trend.

The author was an equity analyst, an investment banker, and a private banker for 15 years before becoming a full time trader, which she enjoys doing very much now. She has such a strong passion in stock trading and would like to share her experience and knowledge with others. Please check out her other articles at http://stock-trading-for-beginners.com

Article Author :July_Wirawan