Fundamentals Of Technical Analysis
Technical analysis has become one of the most popular science of trading. Even it is defined as not exact since that cannot guarantee future price trend, many traders are looking at it as it is a “trail to the gold”.
Now, when the computerization is developing to the higher levels, many technical analysts are forgetting about basic principles of analysis. Majority of retail and even professional traders and investors are jumping into the world of technical indicators in attempt to find or to develop a trading system or strategy which would make them rich “overnight” or allowed them do nothing and receive stable income flow. With hundreds of technical indicators many traders get lost in testing. It is difficult to call as analysis a process of selecting technical indicators and trying different indicators setting with purpose of finding a combination that works.
Yet, the main part of traders are focused exactly on that by considering themselves as professional analysts and by forgetting that this is not analysis but a simple testing.
In 1930s through 1940s when the computers were not used in the stock market analysis, traders and technical analysts were more focused on the analysis of the stock market itself. They did not look for magic indicators that would tell when to buy and when to sell. They tried to understand underlying processes behind price movements. They dig though years of historical data in order to find out what was the moving force of price before and used this knowledge to define what moves price now and where it possibly could go in the future.
Technical analysis based on the testing various indicators setting still can deliver nice profit. However, without understanding the meaning of technical indicators and translating indicator’s movements into actions of traders, any trading system or strategy is doomed to failure. Already a hundred years ago, investors understood that price does not go down because Stochastics run over 80 and price does not go up because Stochastics dropped below 20. Price is moved by supply and demand which is created by the investors’ sentiment or by desire of mass to sell or buy.
Overall, there could be one advice only. Before going into a search of technical indicators, it would be correct to refer to the fundamentals of technical analysis. I particular, basic knowledge of Dow and Elliot Wave Theories could provide a novice trader with basic knowledge of cycles in the stock market as well as some understanding of trader’s psychology and how price movement could be explained by investors’ sentiment.