Revealing the Truth of Technical Analysis

In actual trading, technical analysis is often not as simple as imagined. Although traders may easily identify support and resistance levels in historical trends, capture price trends, or use various indicators to find buying opportunities, real market trading is often far from as smooth as ideal. This article will reveal the truth of technical analysis and share how to conduct trading correctly.

What is Technical Analysis?

Technical analysis assumes all known fundamentals are already in the current price of a security. This means market prices reflect all information, so you can see trends and patterns to make trading decisions. Professional tech analysts believe in the repeatability of investor behaviour which shows up on historical price charts. This repeatability is what allows tech traders to forecast future price movements based on past performance.

Tech analysis has its roots in Charles Dow who laid the foundation in the late 1800s. Since then it has evolved to include many price patterns and trading signals from years of research. Today tech analysis is all about looking at price movements and trends on historical price charts and using past data to make predictions about future price action.

Tech analysts use various stock charts to see significant price trends and actions that suggest future movements. By understanding these trends you can make informed decisions on entry and exit points and get better trading results. Tech analysis is flexible and can be applied to any security – stocks, futures, currencies.

Tools and Techniques in Tech Analysis?

The perfect form only exists in textbooks. If traders continue to pursue perfect entry points, trading will become extremely difficult. For example, if the price is expected to accurately hit the support level set by the trader and immediately reverse, many trading opportunities and profits may be missed. Market price behavior is usually more complex. For example, if the price slightly drops below the set resistance level, it does not mean that the price has confirmed a breakthrough. There may be differences in the analysis of different traders in the market, and traders may also create false breakthroughs and other technical signals to cut leeks. Price behavior reflects the emotions, irrational behavior, and supply-demand relationship of traders. Therefore, when the market is full of uncertainty, you cannot expect prices to perfectly follow your technical analysis.

Don't be too confident and believe that your technical analysis is 100% correct. It is wise to start trading from a small principal, adopt effective risk management strategies, and view key prices as regions rather than precise points.

The market will not immediately reverse after a halt. Although price reversal is a common trading strategy in technical analysis, many traders do not know how to analyze market reversals. Prices usually provide more signals and opportunities than immediately changing direction after stopping. Therefore, do not rush in and only intervene after there are more confirmed trading signals.

For example, when the market is in an upward trend, seeing a cross star may make you think that the upward trend has weakened and the price will reverse and fall, so you sell short, but in reality, the price is still rising, leading to losses. When the trend is about to reverse, prices often do not immediately appear in a candle shape but may clear excess buyers and sellers in the horizontal market, paving the way for more trading opportunities, so do not rush to intervene in trading.

Beware of traps in technical indicators. Sometimes relying on technical indicators may make your entry time too late. Because technical indicators often lag behind and are calculated based on past data, market changes cannot be captured in a timely manner. Don't wait for all technical indicators to signal at the same time; otherwise, traders may miss the opportunity to enter. Price behavior is usually more timely and accurate, without lagging behind. Technical indicators can be used as auxiliary tools, but they are mainly based on price behavior.

There has always been a debate in the market about which price behavior or technical indicators are better. Some people believe that price behavior is the best because it provides the most accurate trading signal. But some people also believe that technical indicators are better because they provide clear and systematic trading opportunities. In fact, both have their own uses. Price behavior provides timely signals, while technical indicators can assist in analysis. Combining the two can improve trading quality and success rates.

Listen carefully to the price announcement. To conduct high-quality and high-winning trade, it is necessary to trade based on price signals. The price will tell the market which side has stronger momentum, which price range, the likelihood of price reversal, and the reaction of prices to previous highs and lows. In price behavior analysis, do not rely too much on a single signal but rather integrate multiple signals to develop trading strategies.

Understand what type of trader you are. There are two main types of technical analysis in the market: predictive and reactive. Predictive analysis attempts to predict price trends and intervene in trading in advance, while reactive analysis waits for clear signals from prices before entering. Choosing a suitable approach and strictly executing the trading plan will help improve the quality of trading.

Technical analysis is an art that requires continuous learning and practice. Don't be fooled by perfect form, delayed technical indicators, or overly confident chart analysis. Improve your trading skills through the comprehensive use of price behavior and technical indicators, as well as wise risk management. After all, trading is not a simple game but a process that requires rational thinking and firm execution.

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.