Day Trading Tips and Tricks

June 30, 2023

Indicator Warehouse

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What the Heck is Technical Analysis? A Trader’s Guide

technical analysis“And they’re off!”………..or are they?  Although the horse race begins with a loud announcement and a bell, we unfortunately do not have the same clear signals much of the time in the markets.   Technical analysis is a game of incomplete information and risk.  If we were able to know all the answers, there would be no money to be made as no one would ever take the bad side of an obvious trade, or it would involve illegally conning someone into giving you their money. If that doesn’t make sense, just think about why we don’t bet on games that have already happened, and what the persons involved would be doing if it DID happen.  

Trading in the real market creates a situation where the outcome is unknown, therefore allowing different viewpoints to “take a chance” on their information and analysis and completing the necessary condition of a buyer and a seller to make the transaction exist in the first place.  The difference, in the long run, for the most part comes down to which side of that equation has done a better job gathering only pertinent information, thrown the rest aside, and making decisions based on what is left in a prudent, consistent and disciplined way. 

That being said though; during planning, analysis and the decision process with a trade, you exist in only one of two conditions:

  • Analyzing History:  Yup, virtually every single indicator and oscillator takes information that has already occurred and presents it in a myriad of different ways.  This information gathered builds a picture based on how the market has reacted in the past, whether that be a decade ago, or a single tick later.  We are essentially trying to form an opinion of what IS or WILL happen(ing) based on what HAS happened.  Obviously, the future is unwritten so there is a limitation to how accurate this analysis can ever be.  BUT, as some would state as unreliable, I would argue that there is most certainly a spectrum of quality and accuracy in which one is able to reason to a relative degree of certainty that a decision will be profitable over time based on certain combinations of historic events.  We just must be careful in our application of history and always keep in our minds that “future performance may NOT reflect historical results”.  It is wise to be use that as temperance rather than a reason to give up. 

technical analysis with custom indicators

  • Predicting/Speculating the Future:  Yup, the other side of the analytic coin is that if we are not gathering historical data, we are predicting the future and this too, comes in a remarkable array of shapes and sizes.  The majority are however, inextricably linked to historical data which project a certain trajectory rather than simple history “repeating itself”.  This allows for possibilities which have not occurred yet, but has a major flaw with certain “static” growth figures such as what happened in the over-inflated housing market pre-2007.  Even very smart economists shaped future predictions predicated on the assumption that the housing market would continue to have exponential growth in prices.  I think we all know how big of a mistake that was now.  Again, just like using history to make decisions which might repeat themselves, predicting the future is vulnerable to mistake.  And once again, use that fact as temperance rather than a reason not to attempt to predict.

Now that we understand the two most basic building blocks of what we do in the course of market analysis, I want to take a moment to synergize them together.  The very purpose, just “why the heck” we need to analyze is to improve the odds.  May they ever be in our favor.  We realize that losses are certainly part of trading.  Remember, without that risk of loss, no one would ever win.  It is vital to the lifeblood of opportunity in free markets.  All we can do is try to “stack the deck” in our favor as much as possible, and then consistently apply our strategies based on that analysis in a market that offers favorable conditions.  By combining historical knowledge we can look for parallels in the future (such as an important historical horizontal support/resistance), as well as make trajectory predictions (like a trendline as one example).  Combine the two together where they meet and you have stacked the deck in your favor.  Sure, the market might NOT react at that point, but more times than not (given normal conditions), it will, and you can profit from it.

So what kind of information is out there to check out?  Well analysts are broken into two very broad categories which both have their place in the trading world.  The majority of the time any single person will likely lean heavily to one side or the other, but I would say it would be ignorant of any person to completely disregard one for the other.

  • technical analysis trading systemTechnical Analysis:  This involves using technical data and charting to analyze and predict future movements within any tradable financial instrument.  This school of thought relies on price movement as the core focus for analysis.  Technical analysis attempts to identify very definitive and specific areas of price action/reaction across a cornucopia of styles, goals and functions.  A technical analyst relies heavily on past events to create situations in the future that are tradable.  Future predictions are extensions of history either through trajectory or repetition.  Tools used are generally indicators, oscillators, and a multitude of other charting tools.  Technical analysis through charting covers everything from a fraction of a second up to months and years at a time depending on the chart and is the most flexible on viewpoint.
  • Fundamental Analysis:  This type of analysis involves understanding the surrounding political, social, and financial statements to make decisions rather than the price action.  Often, it offers a “bigger picture” view over technical analysis since it is difficult through fundamental analysis to get the “when” part nearly as accurately as technical analysis although it is much stronger in the “if” part.  Fundamental analysts look much more closely at sentiment, and for future predictions, base them much more on the surroundings of the instrument, rather than what that particular market is doing itself in relation to price at any given time.

Although there are people passionate that technical or fundamental analysis is truly superior over the other, I will leave it at they are both useful and necessary. Overall, it’s just important to remember that analysis of all shapes and sizes exist to help us in our trading, and we should use every tool we can to help, while ensuring we do not create an information overload.  The “Goldilocks” principle applies very much here, where we want just enough to make a good decision, but not too much to where we cast unnecessary doubt over the analysis itself.  Finding this place comes with experience and a great trading system.  By continuing to work at your own market analysis skills, over time you will get there.

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June 30, 2023

Indicator Warehouse

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