New traders face many frustrations. One that isn’t mentioned often is knowing when to ignore certain trade signals.
The chart below, depicting Qualcomm’s (QCOM) share price, is an example.
Chart by TradeStation® Flagship product of Trade Station Technologies, Inc.
The company’s stock, as you can see, has had many dips since late last year. During the time period, prices on occasion fell below the 50-day moving average (see where the arrows are pointing).
That may have been a sell signal to some traders. But it might also have been a damaging error: Selling a stock only because it declines below a moving average isn’t always the right decision. In fact, that’s not a reliable reason to sell a stock in a bull market.
The picture becomes clearer when you put the daily prices in the context of the trend of the weekly chart.
The chart above has the daily prices in the upper panel, and the longer-term weekly chart is in the lower panel. Each daily decline was a correction within the bullish trend in the weekly chart. In fact, the most recent drop was a very small price reversal, when you consider the longer-term trend.
The key lesson is that too many traders are myopic when making trading decisions. They focus too much on a single time frame without regarding the larger trend.
When trading is based on an analysis of daily prices, place the potential trade in the context of the weekly trend. That’s especially true for day traders.
Doing so reduces losses considerably and makes the chance of success much higher. So if you’re a new trader, you will be amazed at how this small addition of price analysis can generate higher returns.
Senior Instructor at The Weiss Center for Investor Advancement
P.S. Want to learn more about how to recognize a big trend by analyzing charts and daily prices? Starting Feb. 24, I will be hosting a three-part course designed to teach investors just like you about the most common technical indicators found on almost every charting platform. Being able to spot these trends can help reduce losses and gives you the potential to generate higher returns. Click this link today to sign up for this informative course presented by The Weiss Center for Investor Advancement.