I've been on both sides of the fence with the debate on technical analysis.
"How can past prices predict the future? Every regulated firm puts forth a risk disclaimer that says otherwise."
My opinion is forget about predicting the future and focus on how you can manage risk -- be pro-active.
When I started trading, I spent a good amount of time learning ways technical analysis was applied to markets. Later, I abandoned technicals and replaced my time with studying fundamentals, probabilities, pairs, spreads and non-directional volatility trading. Regardless of system, all my focus was on "risk".
It's interesting where I've found myself in a full circle. On a personal note, I've had to rationlize my own perspective for using technical analysis. In other words, understand how techniques work for me to manage risk -- not predict the future.
In practice, I use a combination of technical, fundamental and trade management strategies. Using futures or option spreads, I shoot for "duration over direction". What does that mean? With limited risk spreads, the longer time you have on the position, the better chances of a trade working out in your favor.
Here are a few of my own thoughts on using Technical Analysis:
- Rather than view as a means of predicting the future, use T.A. to plan around a set of circumstances for entry, managing risk and targets
- Idenitfy opportunities based on a market's characteristics and its behavior
- Combine technical opportunities with uncorrelated risk strategies
- Accept legitimate considerations of T.A. beyond empirical studies that point otherwise
- Form and trade views that are your own
Study World Class Traders & Their Systems
There are many ways to group and interpret indicators for entering and managing trades. Applying technical analysis to trading can result in an edge in the long term. Whether you decide on discretionary or mechanical methods, taking time to learn how to structure your system won't be time wasted.
Rather than write a lengthy documentary, below are some articles you might find interesting.
I'd also suggest taking a look at some known World Class traders with systems they've developed, tested and proved in the World Cup Trading Championships. These include names as Bob Prechter or John Bollinger where software like TradeNavigator might be a helpful starting point.
World Cup Trading Championships and World Cup Advisor. Traders prove their systems with real money in competition. Most recognized is Larry Williams who took a $10,000 account to $1.1 million during competition in 1987.
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