What you should know about TECHNICAL ANALYSIS and how to apply it.
Technical Analysis (TA) is a price analysis method that use stock charts to identify patterns and trends that suggest what a stock will do in the future. So, any person who works applying TA method to come up with actionable outcome can be called Technical Analyst.
I won’t go into the detail of the craft since there’s a plenty of great material available. I would specifically suggest to read these Technical Analysis 101 materials which can be very helpful, especially for beginners.
But anyone who assumes that he can become crafted Technical analyst should bear in mind that predicting TA trend is not only about a craft but mostly human behavior and all these combining factors may work for some but won’t for the most of potential traders.
I would rather compare TA to weather forecasting. The more qualified and experienced you are the more chances you have to guess right but there’s no guarantees whatsoever.
Besides TA is widely criticized by many FA analysts and traders and yet, for some TA specialists it works and they can prove it over longer period of time, like Peter L.Brandt, for example. However, what I wouldn’t suggest is not to blindly relying only in TA methods and ignoring macro factors.
Don’t get too much fond of indicators. Indicators itself are not a determining factor that pushes price up or down. It’s just another look at the price, nothing more. Don’t get too excited about the lines on the graph either, and don’t fool yourself that by properly analyzing the graph you can predict the future prize.
By analyzing the graph, you merely identify where the price was at some point, and if the price had any significant levels of resistance or support. Although TA is widely described as rather simple approach, it is not. In theory yes, but not in practice. Especially if we are talking about diagonal lines and shapes.
There are some things of TA that I find particularly useful. For example, “candlestick charts” provide more information than "line charts". Always start the bigger picture and only then look closer for the details. How much into detail? I would say monthly graph, then weekly, and then daily. Very seldom you need to get closer than daily graph, I would suggest not to do it because that way you’ll just end up more confused. If you are not an experienced trader and you do not have a specific, detailed description of the system you have tested, then do not go into more detail.
It is definitely worth to pay attention to trading volumes, and I would suggest using just one or two indicators, no more. Which ones in particular? It depends on your preferences, which indicators you feel the most comfortable with. Just remember, no matter which indicators you look at, they all are just different view of the price. So, I don’t see the point in looking at the price from too many points of view at a time, it will just confuse you and won’t help you to make the right choice but rather will lead you to so called analysis paralysis.
Keep it simple! Start with the largest time-frame, spot figures you like or feel comfortable with and draw clear lines. If you look at the graph and you are not content what you see, then look for the next financial instrument to analyze. There are many options to choose from, and don’t try to spot something that isn’t there. Be patient and you’ll spot the right trading signals in daily charts. Good, classic charting patterns and figures in daily charts emerges within approximately 4 weeks charting period or more.
TA is relatively good tool for timing. For example, if you believe, from a macroeconomic point of view, that some particular financial instrument should go up or down, then the TA serves as a very good assistant in determining the timing at which it should occur. Either way it serves as a good tool that will complement your analytics data, helping to make a move at the right time.
Well, all this so far have been mostly about the theory. The theory without practice is useless, especially in this industry. My next blog post will be about my SETUP, and we’ll look at some samples and transactions.