The Traditional Stock Trading Methods
Traditional trading methods analyze stocks in different time frames:
The long-term time frame is used to evaluate the value of the company together with the position of the overall market.
This is the fundamental analysis.
The mid-term time frame will monitor and detect trend changes.
This is typically done using standard technical analysis tools such as the MACD, RSI, EMA, and others.
The objective of the short-term time frame analysis is to select good entry/exit timing.
This typically involves candlestick patterns as well as short-term technical analysis.
However, the problem is that standard technical analysis, based on end-of-day (EOD) data, does not work properly in today's new environment.
Indeed, in the last few years, the stock market has seen dramatic changes, but none of the present tools deals with such changes.
Volatility has increased because more traders have instant access to information and therefore can (and do) react instantly to news.
The sheer mass of trades has the potential to abruptly move the stock price in one direction or another.
Upwards momentum can therefore quickly build up and turn into exuberance, while downwards momentum can feed the start of a panic selling movement
It is critical to compare the evolution of both price and volume changes over very small time intervals, for two reasons:
- To assert if a sudden price change has been caused by an unusual volume change
- To quickly judge if the stock is entering extreme movements caused by exuberance or panic
Since April 9, 2001, all the major US stock exchanges converted their quotation systems from fractions to decimals.
This process was called decimalisation.
The smallest spread between the Bid and the Ask, or the smallest price change moved from $0.0625 (1/16th) to $0.01.
Decimalisation had very significant consequences on the way funds enter or exit positions.
To know more, click here