Understanding the Market Structure

Market Structure


Investors keen to outperform the market – that is, investors looking for returns higher than the market average – take to active trading, employing various methods and strategies.

Active trading, including day trading, is better understood by distinguishing it from buy-and-hold investing. In buy-and-hold investing, investors disregard day-to-day market fluctuations essentially for two reasons: one, they believe that effects of short-term movements are really minor and, two, because they believe that short-term movements are almost impossible to predict with any degree of precision.
Active traders, on the other hand, are a different breed. Active traders are driven by the urge to look for profit potential in the market’s temporary trends, which means trying to sense a trend as it begins, and to predict the direction in which it would head in the near future.

However, a larger number of trades does not necessarily translate into greater profits. Outperforming the market, which is what active trading is all about, is not to be mistaken for doing many trades; rather, the focus is on maximizing opportunities by employing a conscious strategy.

What are Technical Indicators

Technical indicators are the squiggly lines often found above, below and on top of the price information on a technical chart. Indicators that use the same scale as prices are typically plotted on top of the price bars and are therefore referred to as “Overlays”

A technical indicator is a series of data points that are derived by applying a formula to the price data of a security. Price data includes any combination of the open high, low or close price over a period of time. Some indicators use only the closing prices, while others also incorporate volume and open interest into their formula. The price data is entered into the formula and a data point is produced.

For example, the average of three closing prices is one data point [5,200 + 5,300 + 5,400)/3 = 5,300]. However, one data point does not offer much information and does not make an indicator. A series of data points over a period of time is required to create valid reference points to enable analysis. By creating a time series of data points, a comparison can be made between the present and past levels. For analysis purposes, technical indicators are usually shown in a graphical form above or below a security’s price chart. Once shown in graphical form, an indicator can then be compared with the corresponding price chart of the security. Sometimes indicators are plotted overlaid on the price plot for a more direct comparison.

Technical Indicator Offers

A technical indicator offers a different perspective from which to analyse the price action. Some, such as moving averages, are derived from simple formulas and the mechanics are relatively easy to understand. Others, such as stochastic, have complex formulas and require more study to fully understand.
Technical indicators on the other hand, prove disappointing. I have personally tried many different indicators in the resent past and each one, in turn, has proved more disappointing than the other. May be it’s my individual perception and results may differ person to person. Perhaps for those who trade much longer time frames – weeks, months or years – some of the indicators may help, but for short-term traders there is not much help from most of these technical indicators. And virtually all indicators are correct after the day is over.