Maximize Market Entry Performance with Technical Indicators on Your Side

This article is written by guest contributor Jennifer Gorton from Forex Traders

Investment securities come in various types and forms, but the investors that buy them generally fall into two distinct classifications.  One group, the “Buy-and-Hold” camp, prefers to use fundamental analysis as a basis for finding companies with long-term intrinsic value.  If growth prospects are positive, supported by strong fundamentals, then an investment should provide long-term returns sufficient to meet the investor’s goals and objectives.  The group in the opposite corner is the “active management” camp.  These investors are short-term oriented, use technical analysis to their benefit, and seek short-term profits from arbitrage opportunities in the market. These “traders” have little regard for intrinsic value and rely on wave trends and patterns generated by supply and demand forces in the market.

Each group has its vocal supporters and critics.  Debates have been raging for decades from academics and investors alike over issues of style and whether fundamental or technical analysis provide any advantage at all in today’s random markets.  Books can be written regarding these debates.  It is a given that long-term investors provide stability in our markets, and traders provide liquidity.  If each camp were losing money pursuing their respective strategies, then the debate might conclude.  However, each side can claim incredible wealth accumulation stories to support its case.  The dichotomy is that major investment management firms may preach a “buy-and-hold” strategy to their retail customers, while actively trading the firm’s free capital in its back office operations.

Putting arguments aside for the moment, all value investors would be well served to brush up on a few short-term trading techniques if only to maximize the performance of their market entry points.  Complementary lessons of this type are readily available in foreign currency markets where traders must assimilate fundamental data in a synergistic fashion with the signals generated by their favorite technical indicators.  Trading currencies can involve short, medium and long-term time horizons with strategies designed to profit from each.  However, the notion of “intrinsic value” does not exist with currency pairs.  Each currency’s value is “relative”, depending on the market’s evaluation of each respective country’s economic fundamentals.  Price behavior then reflects this relative balance on technical charts.

Although currencies are not stocks, their price behaviors are similar.  Trends never move in straight lines.  Movements tend to be choppy, zigzag waves, driven by supply and demand forces and trader psychology.  Ample wave theories exist in physics to describe natural phenomena, and many of these have been transposed over market dynamics to suggest resistance and support levels, overbought and oversold conditions, and predictable directions predicated on certain patterns and trends repeating.  Forex traders cannot buy and hold.  Major currencies are less volatile than stocks, and over long periods of time, their fluctuations tend to fall between specific ranges.  Successful trading equates to consistently choosing your entry and exit points to yield profits.

Forex traders rely on a variety of momentum indicators and moving averages to maximize the effectiveness of entries and exits.  Indicators are not infallible, but consistency and skillful interpretation are the keys to success.  To illustrate how this technique might benefit a long-term investor, let’s look at a technical chart for the past few months for Microsoft.

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Let’s assume for the moment that you have studied the software industry and MicroSoft’s position within it.  Company fundamentals are strong, and growth prospects are very positive.  You finish your research in March and decide to buy shares in the company.  Believing that timing was not an issue for the long-term, you would buy at the prevailing market price of $29.50.

What would a Forex trader have done?  First, the Bollinger Bands tightened at that time, suggesting a significant movement was imminent.  The positive candlesticks that followed broke through a previous resistance level, signifying a new upward trend.  Next, the “RSI”, or Relative Strength Index, signaled an overbought condition in the latter part of April, suggesting that a top had been reached.  No one is suggesting that technical indicators could forecast the crisis events in May, but these indicators would have kept you on the sidelines to wait out the market turbulence.

The RSI suggested a “Buy” at the end of June, but the “MACD” did not confirm the trend.  The RSI tends to signal a trend change is coming, but not exactly when.  Another indicator is often used for that purpose.  MACD gave a “Go” in mid-June, but a “double-top” was forming, another signal to wait.  Another confirmed “Buy” occurred in early July, perhaps yielding a $23.00 entry point.  Short-term trader techniques just saved you $6.50 a share, or 22% on the front-end.

Fundamental and Technical investors may be at loggerheads when arguing the benefits of their respective investing styles.  However, at the end of the day, technical analysis can benefit long-term investors in maximizing their market entry points.

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