BankingUnderstanding Technical Analysis Of Stocks, Futures And Commodities
Understanding what the chart patterns of stocks, futures and commodities are telling you (usually called Technical Analysis) can be a valuable tool in determining the trend of any market and assisting with entry and exit levels for your trades.
The goal of technical analysis in the stock, futures or commodities market is to help us determine when a market is trending, and when it is not. If a stock or futures contract we want to trade is trending, then we want to be on board. If it's not, all you are going to do is lose money as you get whipsawed around day after day. This is not what we want as traders.
If you trade using a weekly chart, all it takes is a couple of trends a year to make a lot of money trading. If you trade something like that S&P Emini futures contract, using a 3 minute chart, then you'll need one or two of these strong trends a day to do well, but it's all relative.
Unfortunately, many people fight the trend and buy at every small up tick in a down-trending market, thinking they have picked the bottom, only to see the Stock or index fall further immediately. By the time the sellers are finished, these traders have spent their monetary and psychological capital in a futile attempt to pick the bottom of the market.
Another common mistake traders often make is buying more as the price falls, or averaging a loss. You can imagine how dangerous this strategy can be in a strongly down-trending stock - it's something good traders never do. The trend is your friend, don't ever buck it.
Good technical analysis skills, especially in fast moving futures and commodities markets, give us a mechanical indicator for price points to use for entries and exits and take a lot of the guess work out of our trading. It is very hard to argue that the trend is anything but down at any time if you are simply looking at a series of consistent lower tops and bottoms on your chart.
Does good technical analysis mean you'll always make money?
No, of course not. Losses on some trades are inevitable, as we cannot know for sure what the market will do. It only takes one person somewhere in the world to invalidate your perfect trade set-up and send the price of any market in the opposite direction to what you were certain was going to happen.
All our analysis can do is alert us to probabilities - there are no certainties in financial markets. This is the hardest thing for most traders to accept. We all hate to be 'wrong', but that is the nature of the trading business.
All we can do is take every trade and see what happens. The better our analysis and our trading system, the more likely our trades will produce profits. Every one of us must learn or develop a system of analysis that we are comfortable with, based on what we learn from other traders, mentors and coaches, and then we must take every trade that system signals.
If we start to second guess our system, we may as well throw it away and just stick with our day job. Make a decision to develop or learn a technical analysis system you are happy with, and commit to taking 20 trade set-ups in your preferred stock, futures market or commodity no matter what. Then follow your trading rules to the letter. This will give you an objective measure of how profitable your system is and whether it is right for you.
If you can enter a trade and hold a position, your plan is sound. If not, you may be over-trading (have too many open positions for your account balance and your personal temperament) and need to reduce the size of your position or adjust your plan is some other way.
The large profits come from using a proven technical analysis method to identify a strongly trending market and taking multiple positions with that trend. This naturally involves holding firm and not jumping out at the first sign of trouble. Of course, you can only take what the market is prepared to give, so a system of trailing stops is a good way to lock in profits as they accrue.
Bottom Line: Find a trading and analysis system that's been proven to work from somebody who has actually been trading it for a long period of time, have that person coach you through their system until you can implement it flawlessly, then take every trade signal the system produces regardless so you can test it's validity.
All great athletes, business people (and yes traders) have a mentor or role model who they turn to for advice and guidance. Find one for yourself and your results as a stock, futures or commodity trader are bound to improve.