How to properly apply Technical Analysis in a trading system?
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Most folks will learn technical analysis before they learn other important concepts in trading. The reason behind it is that most technical analyses are graphic-based.
These trading patterns and indicators seem a lot easier to comprehend compared to complicated financial terms and formulas. Hence why most traders tend to over-rely on technical analysis and they tend to overtrade.
Unlike what other trading ‘gurus’ will exaggerate the profitability of day trading on the internet, I do not recommend any form of day trading. Most day tradings are tied with overleveraged CFD contracts and often required lots of margin and brokerage will charge a fee if you hold long-term positions overnight.
In other words, the reason why brokerage firm has this setup is to encourage you to blow up your own trading account. Since you will pay an excessive amount of costs by simply opening a position.
If the trend is in your favor, you will make profits but with a terrible spread, meaning you make e lot less than you should have plus the trading commission, ridiculous margin rates, an overnight fee.
If the trend is against you, you will quickly run out of margin since most CFD contracts have customized insanely high leverage. All market trends will have volatility and up-downs, and that means even if the stock is going higher, it may go lower before it reaches a higher price. That means you will blow up before your stock goes up.
There are 3 things to go through before you learn any type of technical analysis(TA) methods.
- TA is important, but this is not ALL about trading. TA only counts for 30% of the entire trading system.
To be able to capture the entire uptrend/downtrend and trade correctly, one must have solid fundamental analysis skills. Most assets prices are fundamental-driven and technicals will change significantly if fundamental has changed. e.g, Fed raising interest rates or sudden War.
2. TA helps us to better timing our trades and optimize our entry and exit of one trade.
TA is basically a timing and gate-keeping process so any traders can better time their trades and decide their entry and exit points. Most traders view TA as a holy grail and money-printing machine, this is a total misunderstanding of how TA methods are properly applied in this industry.
Except for building a solid TA system, we also require position-sizing skills and capital allocation to enhance our trading strategy.
3. TA should be simple, less is more.
Most analysts like to show off with their complicated indicators and thousand unnecessary lines and marks on the stock charts. Always remember we traders are seeking clear market patterns and structures. Do not waste time creating artwork with over-complicated indicators.
If you are having a difficult time reading your own technical chart you are clearly having a bad TA system.
To sum up, the TA system is like a car driving dashboard, it provides different indicators that one should refer to when they are driving safely. TA gives you a clear understanding of price actions and market structures.
