The Blog

The Art Of Technical Analysis (Part 2)

Continued from Part 1

So what is the advantage in technical analysis?

As it is this human element that moves price, the nature of the market can to a certain extent be predicted, but only over the long term. Let me illustrate this point with a simple example. Call 50 people and we could comfortably predict that a good portion of them, say 50% to 60%, would answer with the classic "hello". So natural is this response that most would be willing to bet a wager on this. But here is the catch; it is not guaranteed what each individual will say, rather similar to flipping a coin and guessing heads or tails. However, over a large number of guesses we will be correct around 50% of the time.

With this same logic, the patterns, or trends, that traders look for that are generated on the bigger time frames such as on the daily chart, repeat themselves time and again over days, weeks and months. Understanding this and knowing how to capture these trends before they have happened, is where the 5% Smart Money excel and consistently bring home the huge life-changing monetary gains a trader wants. However, the result of any single trade can not be guaranteed and so this is where having a money-management system comes in. A Smart Money trader always keeps his own personal bet low incase he gambled wrong but knows that when he is right, his returns will be massive in comparison. Unlike, guessing right or wrong with the phone example above or flipping a coin, being on the right side of the trend makes your money work for you, bring home a much larger slice of the pie than your initial investment.

Trading is a paradoxical art where us traders predict what is going to happen next, based on probabilities, but also accept that there is no guarantee our prediction is correct. This is where trading psychology comes in, which is a whole other article in itself.

So how exactly do you make technical analysis work for you?

If we now understand that these patterns or trends repeat themselves on the bigger time frame, then the first point to drive home is that trading is not a get-rich-quick scheme but deserves the time and education to be mastered just like any occupation one may pursue. With the right education, the best being trained by a Smart Money mentor who already has the knowledge you desire, one will know how to break down the chart to determine an "edge" in current price movement. An edge, in trading, is an area where price has a higher chance or probability of going on to reach a predetermined target and bring home a profit.

It is with this knowledge that the Smart Money keep their risk small, yet consistently outmanoeuvre the market. The word "edge" actually comes from gambling, where in games likes Poker your cards have a higher chance of taking the pot than your opponents. By using technical analysis to look for and by ONLY risking your money on this edge, is how you succeed in trading.

What are the long-term benefits of using technical analysis?

Technical analysis has many advantages once the initial education period, which can take several months, has been completed. Of course, I am assuming that the trader is being smart and getting mentored by a top trader rather than setting off on their own. This is usually a futile and almost impossible way to learn to trade. Many set out with good intentions, but never gain the knowledge to master the markets, some after years of wasting a lot of money and more importantly time, something we can not get back. The advantages are:

  • There is no need to bury your head in newspapers and news channels like Bloomberg to catch up on financial events. News items usually have short-term impact on the major trend and have been usually traded on by the big institutions before they filter out to us, the Smart Money private traders.
  • There is a misconception in trading that one has to trade every day to be a trader. In fact, you trade when the trends or patterns are in play and you stand aside when the market is moving sideways. A good knowledge of technical analysis will prevent you from wasting your money through over-trading, which is a common trait of those who go on to totally blow their accounts.
  • Once you have technical analysis and trading working for you, the biggest advantage is the time factor. In time, you will bring home an income you can build a very rewarding life on, and in no more than 30 minutes a day. It is, after all, more time and not just more money we mostly desire. How many other jobs or fields can allow you to do that?

Can anyone learn to use technical analysis?

The simple answer is: if you have basic analytical skills, then yes, anyone can grasp technical analysis. Spend enough time in the market and you will be able to break down a chart into its basic elements. The real challenge, however, is being able to put this together with the other elements of risk management and trading psychology. It is here where a mentor is essential to guide you from being a novice, to becoming a professional trader, one with a ruthless and mechanical approach to the markets. There is no room for emotions, such as fear, greed and hope, in trading.

Who has learnt to use it successfully?

Individuals in the limelight who have learnt to use technical analysis to make a killing from the market are John W. Henry, the American owner of Liverpool FC, and the legendary Turtle Traders.

How do we at The Traders' Cosmos use technical analysis?

At The Traders' Cosmos, we have learnt to model ourselves on those individuals who have made a success out of trading, those in the 5% Smart Money elite. My knowledge was passed onto me by my own mentors, Javid and Anne, at The Dynamic Trader. They shared with me their simple yet highly effective price-based strategies that I then put into practise and mastered. The conditions of the markets are always changing and the knowledge of a top trader has to allow one to adapt and use the right strategy for the right conditions.