What are some common Technical Analysis trading strategies to exploit market inefficiencies? (2024)

Some of the common technical analysis strategy is trend following, There is a saying that, just go with the flow, this is also applicable in the market also, which is called trend following, So just follow the trend of the market and don't go against the market. there are many indicators which can help you in the trend following.

There is a popular say, "trend is your friend" do not trade against the trend. It is a great and one of the most resourceful information in trading community today.The whole major participants are heading in a direction and that is why it is sustained, a retailer should follow the trend direction to be profitable even in the long run.

Mean reversion is like predicting a rubber band snapping back to its usual position after being stretched. In the stock market, it's about betting on prices bouncing back to their average or usual level. Imagine a rubber band getting stretched too far. In mean reversion, we use tools like oscillators, Bollinger bands, or Fibonacci retracements to see if stock prices are stretched too high or too low. Prices often go haywire due to random stuff, emotions, or irrational behavior in the market. Mean reversion helps us take advantage of these temporary swings and make smart moves.

Mean reversion is a natural phenomenon in trading inefficiencies created.Knowing that the market will not buy for a life time and not sell for a life time.The magnitude of a price pump in a direction suggests a reverse, it is related among retailers as "retracement" most times.The necessity for the mean reversion is the probability of the price to head up and break previous high or low created with massive pump in the past.

Technical analysis has multiple setup with different accuracy. One of the most commonly used setup is trade with the help of different price movements. You can watch average trade price in different time zones, if the price deviates from its mean price zones, it may ne a signal to take entry or exit.

This strategy involves entering trades when the price of an asset breaks through a significant level of support or resistance. Traders using this approach aim to capitalize on potential significant price movements following the breakout. They might use chart patterns like triangles, rectangles, or head and shoulders, along with volume analysis, to confirm breakouts and make trading decisions. Personal experience could involve waiting for confirmation of a breakout with increased volume or observing price behavior post-breakout to confirm the strength of the move before entering trades.

When the price break out from a consolidation zone, it is a good opportunity for a trade.This opportunity can be spotted by using rectangle tool or horizontal lines to mark the high and low price of the ranging zone.A break above or below with a confirmation of candlesticks, it is a good opportunity that can be refined.

Contrarian traders are good at taking market opportunity in an opposite direction of the dominant trend direction.Since the price will not buy or sell for a life time, contrarians wait for such moment to take advantage with risk management that warrants such execution.Fibonacci too can be used to gauge this.

Contrarian traders trade against market sentiments. It is a riskier way or trading and needs more experience. These traders watch market trends basis on some hidden tools like VIX, PCR, Price Heatmap, buying and selling zones etc.

Pairs trading, a market-neutral strategy, involves two securities with a high positive correlation. The goal is to profit by trading one long & the other short when their price ratio deviates from the historical range, aiming for a reversion to the mean. Identify pairs by comparing sector components, outperformers/underperformers vs the sector ETF & assess correlation through performance comparison. Short-term trend changes, such as 9 vs 21MA, offer better confirmation & scaling into the trade optimises entry. Pairs trading requires consideration of market dynamics and appropriate pair selection. Despite potential overextension, it can be a profitable approach for traders willing to invest effort. For further discussion, gary@braeskye.com.

From my experience, one un-explored arbitrage area is the implied volatility arbitrage.At the time of the Gamestop craze, I personally did some implied volatility arbitrage between the options of Gamestop and the options of one of the ETFs where Gamestop was part of (where the massive price jumps of Gamestop made it much higher in weight in the ETF holdings).At the time, there was a clear miss-pricing of ETF options. I assume that the MM models were never sophisticated to validate against the individual ETF holdings implied volatilities, but of course this gap has been closed afterwards.

Arbitration is one of the most commonly used trading technique among professional traders but rarely used by retail traders. This is most safer way of trading, in which you buy and sell same security in 2 different exchanges at deviation points and book profit out of that. Let's suppose you bought XYZ share at 10 doller at one exchange and at rhe same time you sold that at 11 dollar in another exchange, once the price will be settled that trade can be square off to book profit in that trade.

There are many price inefficiencies in the market.The ability of a trader to identify them makes it better for a trader to take advantage when the opportunities present themselves.

The edge in these strategies is the "over the long run" and across a portfolio of positions. This is where most drop the strategy, especially trend trading. As it takes many losses, typically more than 60% of your trades will be losers. The key here is to have consistent risk per trade, as over the long run, your few winners will pay for the losers and then some.