The core concept of technical analysis is to trade with the trend. If your trend indicators tell you the security is trending upward, buy it. When it stops trending upward, sell it. If you don’t know what’s going on, don’t trade. Don’t fall into the value trap — that a high-quality security will come back after a fall. It may, but you may have to live a long time to see it happen. While you’re waiting, you’re missing opportunities to build capital.
Don’t let the seeming complexity of technical analysis scare you off. The technical analysis workspace is a chart showing the price of a security over time. The tools you use in that workspace are indicators. You learned about charts in grade school and the arithmetic behind indicators is usually nothing more than the basic addition, subtraction, multiplication, and division from grade school. In a nutshell, technical analysis can be stunningly simple. You can go on to make it more complicated, but you don’t have to — you can keep it simple.
Accept Losses
Don’t trade at all if you can’t accept losses. Acknowledge that you’ll take losses, and that you must control them ruthlessly to preserve capital. The biggest cause of losses isn’t bad indicators; it’s failure to admit your trend indicators are sometimes wrong and you need to intervene to control losses. Technical analysis is about making money, not about proving your indicators are right. You can’t make money if you can’t control the occasional loss. The tool for managing losses is the stop-loss order. No trader is successful over the long run without using stop-loss orders.
Interpret what the indicator is saying about crowd sentiment. Indicators measure whether a security is trending, the strength of the trend, and when the trend is running out of steam. No indicator measures everything, so understand which aspect of crowd sentiment your technical indicators is focused on.
Take an empirical approach. See what you’re looking at on the chart. Don’t let confirmation bias, more commonly known as wishful thinking, skew your vision. Accept the evidence of your eyes. When you misinterpret a chart, go back and find what you missed.
Use at least two indicators. One technical indicator is better than none; just using the 200-day moving average on the Dow or S&P 500 would have saved your bacon in all the bear market downturns. Then apply a second indicator to get the confirmation effect that improves your odds of being right.
Every indicator works
Indicators are effective in identifying both buying opportunities and warnings for when you should get out and sell. The technical analysis world has devised dozens of indicators, and you can’t hope to use them all. There is no single best indicator, but there are a few best indicators for you. The best indicators for you are the ones whose inner workings you understand and the ones you are comfortable trusting because they perform well consistently and reliably for you.
Don’t let the seeming complexity of technical analysis scare you off. The technical analysis workspace is a chart showing the price of a security over time. The tools you use in that workspace are indicators. You learned about charts in grade school and the arithmetic behind indicators is usually nothing more than the basic addition, subtraction, multiplication, and division from grade school. In a nutshell, technical analysis can be stunningly simple. You can go on to make it more complicated, but you don’t have to — you can keep it simple.
Every indicator fails sometimes.
The core concept of technical analysis is to trade with the trend. If your indicators tell you the security is trending upward, buy it. When it stops trending upward, sell it. If you don’t know what’s going on, don’t trade. Don’t fall into the value trap — that a high-quality security will come back after a fall. It may, but you may have to live a long time to see it happen. While you’re waiting, you’re missing opportunities to build capital.
Accept that all trading, including trading using technical analysis, sometimes results in losses. Losses can arise because the market goes haywire and behaves in a bizarre and abnormal way, while your indicators were chosen to work well under normal conditions. This is the luck factor and doesn’t mean your indicator skill is faulty. Similarly, every indicator has the potential to lead you into a trade that delivers gigantic gains. It’s still abnormal market behavior and doesn’t mean your indicators are magical and your indicator skills exceptional.