We have learned that there are different types of traders in the stock market. In this post we will identify them through the use of a stock chart. Below is an example of a stock chart of Universal Robina Corporation (URC).
This type of trader is looking to hold stocks for long periods of time. They buy stocks that are first breaking out of basing patterns into a stage two uptrend. This is likely where you will see institutions buying stocks. This buying pressure is what starts the uptrend. They are hoping that the next two groups of buyers will push the stock higher.
This type of trader buys stocks that are, well, showing momentum! They buy stocks right after a major move in a stock and hold for a short period of time. They are hopping on a board a fast moving stock looking to capture short term gains quickly.
Swing traders use technical analysis to look for stocks with short-term price momentum. These traders aren’t interested in the fundamental or intrinsic value of stocks, but rather in their price trends and patterns. Swing traders uses the traders action zone, they look for reversals on this area.
On the sample chart above the the area in between the 10 SMA and 30 EMA is considered by swing traders to enter and buy the stock and this is also the swing traders action zone.
It doesn’t matter whether you use SMA’s or EMA’s. There is little difference between the two so don’t get caught up in the variations. We are just using these moving averages to create a zone that we will find our entries for long and short positions.