Technical analysis offers a wide variety of tools to use in stock trading. As an example, there are oscillators to help determine near term overbought and oversold conditions, and alert stock traders to possible divergences. They offer ways to measure rates of change (ROC) using price ratio and differences. The trader can use two moving averages, the RSI or Stochastics to spot short term extremes and crossovers.

Divergence analysis gives us the oscillatorââ,¬â"¢s greatest value. However, the trader is strongly cautioned against placing too much importance on divergence analysis to the point of ignoring or overlooking the basic trend. An oscillatorââ,¬â"¢s buy signals work best in uptrends, and the sell signals, in downtrends. Always start your market analysis with determining the general trend of the market. Oscillators can be used to help time market entry once you determine the market direction. Buy when the market is oversold in an uptrend and sell short when the market is overbought in a downtrend. Or, if you are using the momentum oscillator, buy when the momentum crosses back above the zero line when the major trend is bullish and sell when there is a crossing under the zero line in a bear market.

Trading in the direction of the major trend is extremely important and cannot be overstated. There is a danger in placing too much importance on oscillators by themselves. It is the temptation to use divergence as an excuse to enter trades contrary to general trend, which can prove to be a costly and painful experience. Tools are very useful when used in conjunction with, not as a substitute for, basic trend analysis.

Andy Swan is co-founder and head trader for DaytradeTeam.com.  To get all of Andy's day trading, swing trading, and options trading alerts in real time, subscribe to a one-week, all-inclusive trial membership to DaytradeTeam by clicking here.