Technical Analysis

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Technical Analysis

Introduction

Experiences With Technical Analysis

The Professionals

What never ceases to amaze me about the whole subject of trading is the number of people who feel they can simply turn to it without any experience or prior knowledge. How many professions would you do tomorrow without any prior knowledge or experience? To learn any professional subject can, and usually does take many years. Why should trading be any different? Whilst the internet has made it possible for everyone to access and trade in the world’s financial markets, with power comes the need for control and knowledge. New traders have as much chance of long term success in the financial markets as they would have climbing into the cockpit of a formula one (or Indy) car tomorrow. They might get a lap or two in, but as soon as they get over confident, off they will go in to the barrier. Frustration and aggression will produce the same results. The odds are stacked heavily against them, but when it comes to financial markets, this fact appears less obvious. This is because the effort required is relatively small, filling in a few forms and sending your cash off to the broker.

IQ ¹ $

Remember relying on the fact that you are reasonably intelligent is not enough to make money consistently in trading. The word "consistently" is crucial to the sentence. Some people make a lot of money quickly (99.9% in bull markets) and think the game is easy, only to find the rules change unexpectedly and they lose the lot and more. Being able to read market conditions is the power of technical analysis when it is used properly. Markets tend to trend only 1/3rd of the time, which is where the main opportunities occur. Effectively 2/3rds of the time you shouldn’t even be trading, but sitting on your hands. At the very least your strategy should change to reflect the conditions. One fact remains-what you do over the long term is more important than any individual trade or group of trades you take. The long term being 3-5 years plus.

Fact is Stranger than fiction

If you wanted to invent something to baffle the majority of people, you probably could not do a better job than the financial markets. So if you think in the same way as the majority you will join the 90% who lose. Trading is a zero sum game. This means someone has to lose for every winner and the rules are not like any other you will encounter. The majority can not win over the long term (again there are good reasons for this which involves a long explanation). Independent thinking is the key to the markets. You shouldn’t care about any one else’s opinion other than your own.

Wheel of Fortune

The markets are like a huge casino where the odds consistently change. Their 24-hour accessibility is enough to warrant caution. Few people really know what opportunities should be taken and what should be avoided, or indeed when the odds have changed. Financial markets are, however, more predicable than anything you will find in Las Vegas. Again, there are very good reasons for this. In my view good trading is an art form and far removed from the "eyes-closed" type gambles you can take at casinos.

Timing

Most new traders feel as though they should hold positions every day no matter what conditions exist. There is no logic to this other than the individual’s perception that, in markets, results are directly related to the number of hours spent staring at a screen. Time spent learning is more important than time spent doing. Quality not quantity is key.

Given my own experience, I am rarely, if ever, surprised by market movements. The words "too low" or "too high" do not enter into my trading vocabulary. Unless you are patient enough and have the money to experience all market conditions over many years, you are going to need a tool that provides pro-active, not re-active information. Mistakes in trading always cost money. You can’t get an eraser and start again.