Technical Analysis – Is It For You?

Defining Technical Analysis
What is technical analysis? Simply put, technical analysis is translating information from the past to predict future movements. It really doesn’t matter what you use to predict the future, it could be charts, oscillators, patterns, or moving averages to find your answers. Now, if you’re looking at the movement of the stars to predict how the stock of Microsoft will fare in the next 14 months, I have no idea what that would fall under. You might want to have a check up before reading this article…

Charts and Timeframes
There are a variety of charts available and there is no obvious right answer. I use candlesticks because I like having green and red on my screen (those are the actual colours of my candlesticks). Other charts include bar, line, and point and figure charts. Whatever works for you, is what you should use. Originally, I used line charts it wasn’t visually appealing to me. Yes, I know that probably shouldn’t be the only reason (and isn’t) why I should choose a type of chart.

With every chart you can choose a different timeframe to look at whatever you are trading. It could be 5-second intervals to 1-year intervals. It could vary depending on what chart service or broker you are using but either way you have a lot of variety. You should be looking at a variety of timeframes to get a good idea of the bigger picture. However, this would depend on what type of trader you are. If you’re a scalper, meaning you look to earn profits from extremely short timeframe, then you might not care about what the stock might have done in the past year, although it probably still does matter.

You need to understand what kind of trader you are before you set in concrete how you decide to set up your charts. Well, obviously you are a technical trader if you’re relying solely on charts for your trading decisions, but even within technical analysis everyone has their own distinct style of trading. At the point of the article, I have been trading for a mere two and a half years but I have my charts set up. However, I’m always looking for new ideas to add and changing things that aren’t working for me. Nothing is concrete; you always need to evolve with your use of charts and timeframes.

Trading with the Trend
Ah yes, probably one of the things that you hear the most in the trading world. Trade with the trend! Geez, it’s such an obvious thing to do and if you could do it, I guarantee that you would be a billionaire! The problem is, when you’re in the heat of the moment, it’s often really hard to determine if you are in a trend. Even if you are, you never know when there could be a sharp reversal (movement in the opposite direction). The market could also move into a long-term range you really never know.

Moving Averages
Moving average like the MACD (Moving Average Convergence Divergence) are often linked with trends.  Moving averages are essentially the average price of a security over a certain amount of time. There are different types of moving averages. The Simple Moving Average (SMA) adds the closing prices of a security over a given number of days and then divides it by the days. While the EMA (Exponential Moving Average) gives greatest weight to the latest information therefore putting more emphasis on what happened recently. What you choose entirely depends on what kind of information you want the moving average to give you and your trading style.

Other factors
I might get in trouble for not talking about the other things in technical analysis like indicators, oscillators, etc. I promise I will eventually, it really is too much information for one article and I need to do more studying myself. Technical analysis has everything and even if you aren’t a trader and are a longer-term investor, you can still use charts to your advantage. Even if you a fundamental believer you can still use technical analysis to compliment your trading style and help you confirm what you have learned with your fundamental analysis.

Mo2 Thinks
Technical analysis at first glace seems like an overwhelming field. And guess what? It is! If you try to look at everything and try to take on quantity over quality, you won’t accomplish anything with your trading. Imagine using 4 different charts and 10 different indicators and having various signals that don’t amount to anything. Obviously some tweaking is necessary and I’m sure some are capable handling 8 screens with different charts, timeframes, and oscillators; but last time I went to the Optometrist, I only had two eyes.

I like to keep things simple. I use one chart, sometimes two timeframes, one moving average, and two oscillators. I’m not saying I’m right because I don’t think I am. I still have much to learn and probably will change how I trade with time but I’m not in a rush I’ve made mistakes when I have tried to change things on the fly, always try to look at what you are using and if those indicators compliment your trading style. By golly, now you have to analyze how you use technical analysis! It’s a lot of work but if you can understand how it all works, it is definitely rewarding.

I’m a hybrid trader meaning I also look at fundamental analysis for help. I don’t try to over clog my mind with too much information but I try to stay on the right page with my ideas and do my best to grasp what’s happening in the markets. Not an easy task, but with time it becomes second nature. Everything takes hard work and technical analysis is no different, if you expect to make millions overnight, trading is not for you. If you heard of your neighbour making a million dollars just starting out with technical analysis, chances are they’ll be giving it back much sooner.

If this is what you want to do, read like mad! Try trading with technical analysis with free accounts or use minimal funds to test your ideas. Practice does make perfect and you definitely need to understand what you are dealing with to do well in any market. You need to stay disciplined because you always make similar mistakes unless you are on top of what you do. It’s a long-term investment of your time and money but it will surely pay off if you work hard enough. Good luck!

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