Technical analysis describes different ways of predicting the future of the stock/futures market based on its history. Unfortunately, technical analysis is not an exact science. Many prominent scientists claim that due to market efficiency, if you use technical analysis to find your entry positions, youre no better off than someone who chooses those positions randomly. Market efficiency means that all the available information is already calculated in the stock prices, and that you can only guess how will the price behave in the future. Since any trader has or can have access to the same technical analysis tools we have to ask how can small group of traders consistently win and the other larger group, more or less consistently lose in the market.
What is it that winning traders know about technical analysis that gives them the upper hand?
The answer is simple:
Technical Analysis works but not necessarily for the reason most people believe.
Many successful traders dont want to share this secret. Technical analysis works because many people use it, and successful traders are able to predict how other people will react on the different technical analysis indicators and signals.
In other words, while the losing traders are using technical analysis to determine their trades, the winning traders are winning because they know how the losers are going to react based on this data.
For example, when a price goes below one of the key moving averages, (MAs) many investors sell that instrument to protect themselves against additional losses. By doing so, they will drive the price of that instrument lower and that will prompt some traders to start short selling that instrument in anticipation of further decline. Prices continue the downward trend, forcing traders who were long on that stock to sell their positions because it is going below their stop limits. This creates a domino effect as the price continues to decline. However, at this point, successful traders realize that most of the current price action was created artificially. They start to enter positions on the buy side and more often than not price starts to reverse. The losing traders have already sold their contracts based on the technical analysis tools. The winning traders buy the contract because they understand that the fluctuation was temporary, and they seize the opportunity based on the losing traders reactions.
No technical analysis tool by itself will give you reliable buy or sell signals. There is no magic black box that will give you the perfect, accurate signal. However, the combining of the right group of technical analysis indicators with discipline and adequate trading capital has been the road to fortune for many traders. There is no reason why you cannot emulate their success.
What is it that winning traders know about technical analysis that gives them the upper hand?
The answer is simple:
Technical Analysis works but not necessarily for the reason most people believe.
Many successful traders dont want to share this secret. Technical analysis works because many people use it, and successful traders are able to predict how other people will react on the different technical analysis indicators and signals.
In other words, while the losing traders are using technical analysis to determine their trades, the winning traders are winning because they know how the losers are going to react based on this data.
For example, when a price goes below one of the key moving averages, (MAs) many investors sell that instrument to protect themselves against additional losses. By doing so, they will drive the price of that instrument lower and that will prompt some traders to start short selling that instrument in anticipation of further decline. Prices continue the downward trend, forcing traders who were long on that stock to sell their positions because it is going below their stop limits. This creates a domino effect as the price continues to decline. However, at this point, successful traders realize that most of the current price action was created artificially. They start to enter positions on the buy side and more often than not price starts to reverse. The losing traders have already sold their contracts based on the technical analysis tools. The winning traders buy the contract because they understand that the fluctuation was temporary, and they seize the opportunity based on the losing traders reactions.
No technical analysis tool by itself will give you reliable buy or sell signals. There is no magic black box that will give you the perfect, accurate signal. However, the combining of the right group of technical analysis indicators with discipline and adequate trading capital has been the road to fortune for many traders. There is no reason why you cannot emulate their success.
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