In trading and investing, technical analysis has become very popular. But, is technical analysis useful? How does technical analysis work and when to use technical analysis? In this article you will find answers to these questions. At the end of this article, you will know exactly what technical analysis is and how you can use it yourself to make better trading and investing decisions. Stick till the end, because there you will find a video about how to use technical analysis and you will find a free 50-minute-long training to become a better trader now.
Is technical analysis real?
Yes, technical analysis is real. It has been used for a long time and there are very professional traders out there that use technical analysis to gain an edge. I myself am also a technical trader. I don’t look at fundamentals. Why? Because we as retail traders get news last. We are at a major disadvantage. That’s why I don’t use it. Trading the news is pure gambling. Yes, you can develop an edge around it, but in my opinion and from my experience it’s simply easier to find a technical edge.
Technical analysis is real. There are so many ways to apply technical analysis. You can use price action, indicators etc. They all have their place; they all can be combined into a profitable trading framework. The point is to find technical indicators, or ways of applying technical analysis that you fully understand and that you like. That’s how you can use technical analysis.
How technical analysis works: the technical analysis guide
With technical analysis you analyze chart data to come up with trade ideas. This can be done very easily and should be done in a clear way. The easier your process, the easier it is to trade. The easier your process of technical analysis, the easier it is to test and to identify a possible edge. Some concepts of technical analysis are:
Smart money concepts
Supply & demand
Support & resistance
Overbought & oversold
Indicator based trading
These are just some concepts that are used in technical analysis. Even if it’s technical analysis for beginners, I think these concepts can be useful.
Smart money concepts
Smart money concepts are concepts about how bigger players in a market operate. Bigger players move the markets and if you can identify what a bigger player is doing, you can potentially join him and make money. Do you want to know more about smart money? Then read this article.
Supply and demand
Supply and demand are all about establishing where there was a massive disbalance in the two. If there is a major area where demand came in, you want to see what happens once price comes back to that area. Is there still evidence of demand coming in? Then you want to be long. You can build an entire strategy around this concept.
Let’s take a look at an example:
The yellow box highlights an area of supply. Why? In this area we had a range and then from there on price aggressively fell down. This is an area where a lot of aggressive selling happened. Then price goes back into that yellow box and falls down again. This is a clear example of supply doing its work. If you can highlight these areas, you know where you should be taking shorts. Then, build an entry setup and you can find an edge.
Support and resistance
Support and resistance, this is technical analysis for beginners. However, there are also professional traders that still use these concepts. They can be very effective if you apply them correctly. Support is an area of previous demand. Basically, a previous area on a chart where a lot of buying came in. Resistance is the opposite: an area on a chart where a lot of selling came in.
In the picture above you can see clear lines of support and resistance. A valid level has multiple touches or is at an important swing point. There goes way more into drawing support and resistance and everyone uses it slightly difference. Find a way you like to draw it, it’s your chart, it’s your map.
Overbought and oversold
Overbought and oversold can be defined in various different ways, such as overextended. You can use indicators to find out if a market is oversold or overbought. Then you can look for a trade setup in line with that bias. It’s about context and an entry setup. Overbought and oversold can give you the context.
Here is an example of an indicator that you can use to identify oversold and overbought conditions. Then, you can use it as a bias to trade in a certain direction. So many ways to apply it. Explore, test and learn.
There are so many indicators out there that you can use in trading. The point is to understand how an indicator works and to line it up with the general concepts you are using. For example, if you trade a mean reversion strategy, you want to look for reversal. In that case an oversold or overbought indicator might be helpful. The indicator has to line up with your idea of trading and should be used as confluence or bias.
Can technical analysis beat the markets?
Technical analysis or fundamental analysis, they can both beat the markets. The point is to find an edge. It does not matter how you trade. If you can find an edge that has a basis in the markets, you are good to go. Technical analysis can give you an edge to beat the markets and fundamental analysis can give you an edge to beat the markets. It’s all up to you on how you find that edge. There are many different techniques.