Technical Analysis and Trading Decision-Making

Although technical analysis is widely promoted as some sort of “Holy Grail” for online investing, the number of unsuccessful traders remains relatively the same, despite the vast amount of information available on the web.

There’s no question that technical analysis is of great importance. FX Concept, the biggest hedge fund operating solely on forex, with $30 billion in funds, went bankrupt a few years ago since the company had a decision-making process based solely on macroeconomic factors. Because of that, today we’ll try and explain how technical analysis needs to be applied in your trading.

Timing and precision

Charts are very informative, despite critics from investors like Warren Buffett, and using them properly could help you understand the change in the order flow behind the price movements you see on your charts.

A proper technical analysis methodology needs to give you some insights about how the “big players” (hedge funds, investment banks, big financial institutions, etc.) are positioning themselves in the market at a particular point in time.

You could say a technical analysis strategy is efficient if it manages to provide you with:

  • The best timing- meaning you are entering the market right before an impulsive move starts to unfold.
  • Precision – the market will spend little or no time on the other side of your trade.

Fortunately, the efficiency of technical analysis is not influenced by your broker.

Technical analysis methodologies

Even though we have a tone of price indicators, oscillators, Fibonacci levels, pivot points, etc., the one thing professionals have in common is that they manage to understand price action.

Price action is simply the price movement over time, which means professionals are able to understand the order flow and anticipate future price moves just by using naked charts.

We know that it is impossible to do from the start, which means the goal of any trader should be to treat technical analysis like a never-ending process of understanding, starting from using many price indicators, to gradually removing them and develop a trading-decision making with limited “technical tools”.

You won’t find a single professional and profitable trader using overcrowded charts to make trading decisions. In conclusion, you must gradually gain more confidence, forget the idea of a 100% accuracy system, and develop a price action model that will help you master the art of technical analysis.




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