Introduction To Technical Analysis
Before the 1970’s Technical Analysis was thought to be a lot of ‘hocus pocus’. The majority of traders and institutions used Fundamental Analysis to determine when to enter the market, and when to exit. Today it is the opposite. Now the majority of traders use Technical Analysis to determine the best time to enter and exit the market.
What is Technical Analysis and how can you use it to trade?
Technical Analysis is the method of analyzing behavior and statistics generated by market activity or movement, such as price movement and volume (the amount of traders buying/selling). It takes past performances of stocks and markets as an indication of what the future performance will be like.
Technical Analysis is done by evaluating charts (similar to a bar chart or graph you have seen in school). These charts can be depictions of time, volume, trades taken place or many other indicators. Essentially, technical analysts look for patterns in price and indicators which might suggest that the market will move in a certain direction.
If fundamental and technical analysts were in a shop, the fundamental analyst would study each product in the store. They would decide on whether they believe that the product is valuable and whether it will at some point in the future, increase in price, and consequently they will buy it.
On the other hand, the technical analyst would sit in the shop for as long as they see fit, until they noticed a pattern or activity that suggests people are buying that product, and then based on their past statistics, and experience they would buy when they believe the price will go up.
Backtesting
Every Technical Analysis trader needs to have backtesting of their strategy or signal. Backtesting is a term used for looking at historical data or previous trading periods such as minutes, days, weeks, months etc. to determine whether or not the pattern that you have discovered or are using, is valid and works. There needs to be enough evidence to suggest that you would be willing to place your money on a trade that you believe will achieve a certain result. Not just taking a ‘hunch’ on what you think the market is going to do.
Once you have enough evidence and conviction that your trading signal produces your desired result, you can then begin to practice using that signal in real time simulation. Simulation (sometimes referred to as sim or paper trading) is where you do everything you would do in real, in order to place a trade, except you don’t use real money.
After you have seen that your signal is producing positive results and you are confident trading it, you can then begin trading it live (with real money).
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