Technical analysis has many strengths and weaknesses. Each strength gives it a sense of reliability, while each weakness brings you one step closer to making a fatal mistake. By being competent in knowing the weaknesses, you can support them with the right techniques for money management and risk management.
Minimum dependence on fundamental information
Almost every day a report is issued in the United States or overseas, whether it concerns function numbers, import numbers or interest rate rises or falls. Every piece of news has already been incorporated into the activity of the market in some form or in any way.
In the past, the concept of seasonal trade was "hot". Every TV and radio guru talked about petrol prices that rise in the summer, heating oil that goes through the roof in winter, or oranges that are swept away by hurricanes. Although these seasonal opportunities may have been tradable in the past, because they are now well-known, the effect of the seasons on the markets has changed. Often the actual traffic on the market happens well before the actual seasonal problems themselves.
So instead of waiting for these seasonal transactions to take place, it is much easier to follow these markets and see the technical analysis movement now. When it warms up, go on the market; if it cools, go on the market; if nothing happens, keep waiting and watching – do not just follow fundamental analysis.
Fast snapshot of data
Price, volume and open interest all on one graph. With the right set of technical analysis tools and asking the right questions, you are able to look at a chart and within a few minutes you can determine whether a transaction is worthwhile or not. You must also be able to determine your profit targets, loss risks & risk management parameters. There is no comparable way to extract so much information from a single fundamental news.
A sense of immediate control and understanding
"What we do not understand, we are afraid."
As traders, we strive to control the situation. The market itself is a beast. It moves up and down, left and right, for how long it wants and how violent it wants. There is little that we can do with our finite amount of capital to really move it. Therefore, the goal is to place the market in a context that you can understand.
Because the mind likes to create patterns, we give ourselves the opportunity to look at daily, monthly and weekly charts. We analyze minute-to-minute diagrams and focus on giving us the best possible opportunity. Technical analysis does exactly that for us. It gives us the window to take a mass of information and place it on the screen and feel that we can ride the wave instead of being crushed by it.
Lagging indicators are not always suitable  Do not misplace your faith. Technical analysis is a great tool to use; at the same time, you have to be careful when you try to use it for predictive functions. Elliot Wave, Gann and Fibonacci can only tell you what happened and what happens, but they can not reliably tell the future.
Once you begin to rely on the predictions to the point where you believe they are absolute and you fail to prepare for unforeseen circumstances, you give yourself a few outs. This goes back to the difference between gambling and speculation. Predictions make us make assumptions about what will happen that leaves little room for what is happening.
Because the information for technical indicators is about price and time movements that have already taken place, it is best to temper your dependence with common sense, which means that you will use technical analysis, do not let it be used.
Tools are available to everyone
Bollinger bands, candlesticks and William & # 39; s% R are in all card software. Of the newcomer who just opens an account for the professional trader working for a hedge fund, the information is immediately available. The calculations are known, the setups are known, as well as the usual market wisdom and gaps are filled.
The use of standard information gives you little or no competitive advantage over fellow traders. In fact, the operation of your game plays into the map of self-fulfilling predictions, leading to predictable stop placements and lashes on the market.
Putting your own custom spin on the tools will be to your advantage and immunity to your predictability in following conventional forms of money management and risk management. Adjust your reactions or your interpretation of the information at each turn to refine your possibilities for a competitive advantage.
Interpretation is more than science Science
No one can guarantee that every time you have a "cup and saucer" the market will be 100% predictable. No one will claim that every time the price of a market upper Bollinger hits, it will collapse in price Technical analysis is an art that occurs as science
Although the numbers themselves can accurately calculate the deviation, accumulation and distribution, but also the relative strength, the interpretation of these data The key, what does it mean this time, and how will I react to that? Everyone has their own twist on the function of their technical analysis tools.There is no wrong way.
This is the reason why many commodity trading consultants (CTA & # 39; s) may have a mechanical trading program, but they still leave the final decisions to discretion, and they know very well that there are patterns and different activities ie can not be left to chance and only to a robot to determine. This is the relapse that too many traders take if they believe that technical tools are the gospel.