The principles analyzed in this text are based on the basics of technical analysis and are highly applicable regardless of whether you do the technical analysis for Forex, Shares, Gold, Silver or stock market.
Inside the examples you will see beneath, you will get to understand the importance of technical analysis and its efficiency and advantages over the software.
Note: In the later text the ‘Technical Analysis’ term will be replaced with the abbreviation ‘TA’.
Technical Analysis Definition
Simply said, technical analysis represents the method allowing you to predict the price direction according to the past prices’ conditions.
TA definition by: investopedia.com
A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.
TA definition by: WikiPedia.com
In finance, technical analysis is a security analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume.
Technical Analysis Software vs Manual TA
(Indicators & Strategies vs Manual TA)
If you don’t follow the basics of TA before opening position, while relying on your indicators and strategies instead, you are on the wrong path. It is almost impossible to go profitable this way in a long run.
Indicators and strategies based on indicators are really good, but TA’s basics have to be implemented manually. The fact all the professional traders apply this method talks for itself.
Have a look at the next example to understand what I am talking about. I picked the current chart at EUR/USD currency pair at H1 time frame. It is not the best possible example but you will easily realize all the important things. Let’s have a look at our chart:
You can notice the appearance of sort of a sideway trend after the large long candle. The price acts within relatively small range. The range has been marked at the image below.
Let’s have a hypothetical example I seek for an eventual chance to trade with the indicators and strategies based on indicators, solely.
In this case (using indicators and strategies based on them solely) 99% indicators and strategies based on it, will detect 4-5 fake signals within the marked area. If you are lucky, some of these signals might turn in few pips for you.
- Does the indicators help you in this case? The answer is – NO.
- Does the strategies help? The answer is still NO.
- Does the Technical Analysis help? The answer is YES.
You may not have noticed, but the TA has already been made. We inspected the chart, defined the problem (small range) and gained all the necessary information telling us it is not smart to trade based on signals of indicators and strategies solely.
What is left to be done is to find the solution on how to open position. In this case it will be done according to technical analysis. Have a look how the TA is used at the following screenshot.
Another rectangle has been added inside the first one. This green rectangle represents the area where the price encountered resistance. It is obvious how the price fell down each time it reached the rectangle.
This area is ideal for opening sell position, regardless of what the indicators or strategies suggerate. Why is it so is easily concluded out of potential and eventual trade loss.
Set the stop loss and take profit
I set the stop loss in the upper part of the image from above. It is situated well above the green area. In this case, it can be set even lower which means the risk has been reduced to minimum. Have a look at the eventual take profit lines (reward). Risk-reward ratio is ideal, 75% traders would opt to trade in these conditions.
I traded the example above in live account. I took the first take profit and it amounts ? of the position. While I wait for the second take profit I don’t assign big importance to whether the price will ever reach the second trade profit as I have already profited and set the stop less well below.
In this case, I traded trend reversal which plenty of traders avoid to do. If you would like to trade trend reversal you have to wait for the price to drag back, wait for the range, similar to this one, to form and open the buy position. In this case, our take profits would be significantly higher as we trade with the trend, thus the risk-reward higher.
Money Management – How Safe Is It To Trade Our Example
The example you have seen is not the most ideal for trade. It is really important to wait for the price to reach the certain level, where the image of what is going to happen next would be clearer.
If you normally invest 1 lot in the position, you would invest 0.6 lots in the stuation shown in this example, as it doesn’t sport the ideal conditions. If you gain a really clear picture and your standard investment is 1 lot, you would probably invest 1.3 lots.
Regards the indicators and strategies, I don’t want you to gain a wrong image about them. Indicators and strategies based on them are important and good tools that I use in 90% strategies.
However, you have to realize one thing – if you don’t get to learn the basics of TA, all the strategies and indicators in the world will not be able to help you. If you suspect to this statement have a look at how many signals your indicators and strategies generated at the example from above.
Hence, you should use the indicators and strategies but only after you see what’s going on at the market, and in order to see this you have to do the TA whether it was made after the trendlines, pivot points, Fibonacci method – you just have to use the basics of TA before you listen to your indicator.
Tell us about your experiences with the technical analysis in the comments and don’t forget to share the article with your friends if you liked it..
Happy trading & Steady market!