Saturday, February 06, 2010

Comparative Analysis

Some traders like to focus on a few stocks and pile on the indicators and do micro analysis. That's great and if they can earn a decent living from that type of trading, then all the power to them. However, that's not the way we trade -- we like using very few indicators (volume, 20EMA, and pivot lines on intraday; volume, 20,50, 200 SMA on daily) and instead do comparative analysis on different stocks/futures/currencies looking for divergence (on top of of course the traditional support/resistance zones we trade off every day).

Of course spotting divergence is not too useful if you don't know what it means or how to use it. The only way divergence will mean anything to you is to constantly look for patterns in your studies and more than anything else, THINK. What commodity was leading the sell-off and what does it mean now that it has stabilized? What were the financials doing while small caps were running? Remember that rotation that was going on a few weeks ago as one sector sold off but another rallied -- it's not happening now and what does that mean? Market is trying to rally but leader stocks are lagging -- what should you do, fade the rally or hope they catch up? (hint, leader stocks are called leader stocks for a reason, never wait for them to catch up).

Comparative analysis won't just make you a better trader -- it will also force you to use your mind and stay sharp, and, at least for us, make the job infinitely more interesting.