Does technical analysis really work to produce high-probability ideas or do we simply see what we want to see?
The concept supporting technical analysis is that price discounts the news.
We believe as technicians that all factors determining the correct price are already baked into the current price. The theory is, the big money has research teams pouring over the numbers and we simply need to follow their lead.
How can you argue with that? Real money real trades. Well the fundamental analysis community believes technical analysis is fool’s gold. They argue that you shouldn’t invest money without doing the work yourself and digging deep into the financials.
To a certain degree they are right but they are making one obvious mistake in their assertion. Swing traders are not investors. We are not setting goals to be a long-term shareholder. We are simply looking for a catalyst and a spot to manage risk.
Can “chart reading” help us earn a consistent annual return?
In my experience. The answer is a resounding yes!
Why Technical Analysis is a Valid Method
Looking at a chart a five year old could tell you if prices are going up, down or sideways. The mystery surrounding technical analysis lies in the swing trader, not the charts.
You need to set rules, guidelines and criteria within the charts so you can define your edge. You might as well be guessing if you don’t take the time to organize these components.
The swing traders who take the time to create a charting plan will possess a powerful scenario building machine that offers opportunity of a regular basis. The key will be having the patience
Technical analysis becomes a valid method when you have structure. When you have an organized method of interpreting what the big money players are doing, you start to develop an edge.
Two common methods of doing this are candlesticks and moving averages. Typically you want to employ one chart that defines a trend and a second that defines entry signals. This allows you to interpret when big money is supporting a stock with new highs and higher lows and the second chart allows you to manage risk.
Where Technical Analysis Breaks Down for Many Traders
Too many of us view technical analysis as a system to make money. It’s not.
I know that may sound like I am contradicting myself but I am not. Chart reading gives us ideas and helps us locate profit targets, risk points and probabilities.
It’s up to us to manage the trade.
The real money is developing trade management skills. The true opportunity for swing traders is learning how to adjust positions and set expectations for shares size, trade duration and how many positions are correct for a particular market condition.
Technical analysis works. It is a valid strategy. The last ingredient needed to make it a profitable venture is you.