What is
Technical Analysis?
Technical analysis is a tool or method, used to predict the probable future price movement of security – such as a stock or currency pair – based on market
data.
The theory
behind the validity of technical analysis is the notion that the collective
actions – buying and selling – of all the participants in the market accurately
reflect all relevant information pertaining to a traded security, and
therefore, continually assign a fair market value to the security.
Technical traders
believe that current or past price action in the market is the most reliable
indicator of future price action.
Technical analysis is not only used by technical traders. Many fundamental traders use
fundamental analysis to determine whether to buy into a market, but having made
that decision, then use technical analysis to pinpoint good, low-risk buy entry
price levels.
Technical
traders analyze price charts to attempt to predict price movement. The two
primary variables for technical analysis are the time frames considered and the
particular technical indicators that a trader chooses to utilize.
The
technical analysis time frames shown on charts range from one-minute to
monthly, or even yearly, time spans. Popular time frames that technical
analysts must frequently examine include:
·
5-minute
chart
·
15-minute
chart
·
Hourly
chart
·
4-hour
chart
·
Daily
chart
The time
frame a trader selects to study is typically determined by that individual
trader’s personal trading style. Intra-day traders, traders who open and close
trading positions within a single trading day, favor analyzing price movement
on shorter time frame charts, such as the 5-minute or 15-minute charts.
Long-term traders who hold market positions overnight and for long periods of
time are more inclined to analyze markets using hourly, 4-hour, daily, or even
weekly charts.
Price a movement that occurs within a 15-minute time span may be very significant for
an intraday trader who is looking for an opportunity to realize a profit from
price fluctuations occurring during one trading day. However, that same price the movement viewed on a daily or weekly chart may not be particularly significant
or indicative for long-term trading purposes.
How to be
a successful trader using Technical Analysis?
1. Find
a trading approach that suits you
The very first thing one should figure out is the right trading method that suits
him, as there is no right size common approach that can guarantee success to
everybody,” says he.
“A person has to know whether he is comfortable
with fundamental or technical, long term or short term, certain types of
markets, wider risk, or less risk… You can go through a whole checklist of
things and find out it’s different for each individual. It’s a discovery
process, an evolutionary process
2. Trading the approach should have an edge
A trading approach may be reasonable, but if it lacks an edge, it may not be able
to provide success. “It can make all the sense in the world. On paper, it might
sound reasonable, but markets do not pay off for approaches that sound
reasonable. They pay off for what works, and what works may often be very
counter-intuitive
3. Manage risk properly
After developing a method that has an edge and that
suits a trader’s personality, the next step should be to plan appropriate risk
management.
4. Follow strict discipline
You
need the discipline to take your method, with the edge and the risk management,
and stay true to it. There are trades that are going to look scary and you’re
going to really not want to take them, but if it’s part of your methodology,
you take them
5. Be flexible
Flexibility is another key trait that separates
great traders from the ordinary ones, as they’re able to adapt and take
decisions according to the prevailing situations.
6. Ability to make bold
decisions
Successful traders always make tough trading
decisions that are contrarian and uncomfortable which an average trader
hesitates to take.
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