We’ve finally come to the last article in our 25 part technical analysis series. I hope you’ve enjoyed it and found it beneficial? In the previous article, we looked at applying technical analysis to Risk & Trade management. There is still though another great, not so obvious, use for technical analysis that we need to look at before wrapping up this series. Another part of the trading and investing jigsaw to piece together! I hope by now, you’re starting to see that technical analysis is not a one dimensional tool. Applying and using the basic inputs to your technical analysis in a simple quantitative/qualitative process, can go a long way to improving your results.
By introducing technical analysis into your trading and investing, you can create the discipline and consistency you need for better performance and help to remove and minimise the human psychological ‘interference’ bias on your trading. We have learnt that:
Technical analysis allows you to understand the psychology of yourself, the market and your trading performance.
We know that the best traders have mastered two components – themselves and the markets. Where the markets are concerned, technical analysis allows the trader to decode in a more simplistic and quicker fashion, the psychology, behaviour and fundamentals at a more ‘macro’level.
To the trader, a chart is worth a thousand words!
As an individual, technical analysis allows you to become more objective rather than subjective in your decision making processes, which is crucial to your success and improving your results. Technical analysis allows you to bring these various components together into a structured process.
Understanding peoples behavioural psychology plays an important part in driving the markets and the profession of technical analysis has created many tools to aid your timing, entry, exit and analytical ability. At this level again, we’re trying to add in objectivity where possible, but it still has a large subjective bias.
You can give 100 analysts the same chart and they’ll all give you a different opinion of where the market is going!
Cycle theory is a great concept to understand. Many of the greats: Dow, Elliott, Gann, Wilder etc have all put in their pennies worth. If though, you can understand by looking at a chart where we are in the trading cycle using whatever technical tools are at your disposal, then this can seriously improve your trading! In simplistic terms, the hypothetical chart below illustrates this point. For example if you know the market is in a stage of ‘desperation’ why would you go long!!
Other tools, such as pattern analysis; whether its a double bottom, a heads & shoulders pattern, a Doji, a trend line, more obscure tools such as Pivots and Fibonacci to determine market support & resistance, oscillators on price, volume and volatility, or even sentiment indicators such as VIX, Commitment of Traders, Currency Strength, market breadth tools, can all aid our understanding of the markets and in turn improve our results.
How can you get an understanding of the supply and demand fundamentals of almost any market from the highly liquid world of FX through to illiquid commodities such as Lean Hogs? Simple: Technical Analysis.
Lean Hogs (Charts: Bloomberg) one of my favourite trades of the year. Spot the pattern? It would be very difficult to spot any supply and demand peculiarities without the help of technical analysis! I can tell you the same played out in 2016 and 2017!
We’re now going to drill in on how technical analysis can help to improve your trading and investing results at the individual level.
It’s not over when you close out your trade!
So you’ve put all that technical analysis into practice, you’ve got your strategies set up, risk management in place, trading plan laid out like you were Sun Tzu, and you’ve been merrily trading away for months. There is still one part of the plan missing! All that trading doesn’t mean anything unless you can understand and decode the results of your actions.
If you don’t keep on top of your trading results, it will be hard to improve – it is that simple!
Trading and investing is a results driven game and knowing your own personal SWOT (Strengths, Weaknesses, Opportunities and Threats) will be crucial to your success.
I was fortunate when I was working in the banks and trading companies; we had teams of accountants, risk managers and management, analysing our every move 24/7 and giving us that data. As a retail trader, or if you’re working in a smaller organisation, you may not be lucky enough to have that sort of support network in place. How do you know if you’re doing something well, trading something you just shouldn’t, taking too much risk or not enough or making consistent, silly mistakes? How do you optimise your performance? In most instances, you’ll need to be your own accountant, manager and risk person!
Two things you’ll need to do:
1. Think like a top athlete.
You need to think and adopt the practices like those of the world’s top athletes. They do not sit on their laurels. They are constantly evaluating, re-evaluating, changing, evolving, processing data and information, to get the slight edge they need to stay at the top of their game. The same should be true for your trading and investing. This is where technical analysis comes in. Technical analysis creates the data for you to analyse!
Make what you find actionable
2.Make results evaluation part of your trading plan
Keeping a trader’s ‘log’ is very, very important – a record in some detail of your trading activity. It is a simple quantitative process that doesn’t need to be hard or time consuming. Technical analysis and ‘commitment’ will help you to create the inputs to such a log.
For example, if you’ve done your technical analysis homework and kept records, you’ll have details like: Entry price, stop level, target and exit point around every trade. You’ll create risk & trade management performance metrics around these numbers: Risk:Reward, points risked etc. Over time, you will have kept a history of your results and this information can be further utilised and built into effective, actionable analysis e.g. win/loss ratios, how long you were in a trade for, whether you were long/short, products you trade regularly or infrequently and do well or not so well at etc etc.
On top of this simple, technically derived quantitative data, you could supplement your analysis by applying additional comment: Why did you close out? How were the market conditions? How was your psychological condition during trading? – all of this will help to create the edge you’ll need to succeed in your trading.
What could such inputs look like and what could you include?
Analysing your own trading statistics helps to take away some of the psychological issues of trading, by helping you to create that essential trading & investing ‘SWOT’ analysis to create an engine of change and improvement.
Anyone can train to be a gladiator. What marks you out is having the mindset of a champion. Manu Bennett
This post-trade analysis does appear to be pure drudgery on the surface, but this is what the best businesses, sportsmen and women etc. do to get to the top of their game. Successful trading and investing is hard work and don’t let anyone tell you otherwise. It requires commitment and the right mindset and normally those traders with these variables in place are best placed to make a success of this business. Technical analysis is just another part of the process; it aids market predictability and creates ‘objectivity’ that gives you the simple spring board you’ll need to make vast improvements in your trading and investing.
You’d be a fool not to introduce some elements of technical analysis in to your trading and investing!
Further reading and learning:
If you are interested in learning more about how you can maximise technical analysis, build and develop your own strategies or learn technical analysis trading techniques and approaches please contact us at THE STOP HUNTER. We offer bespoke training and learning solutions, as well as classroom based learning. Stephen Hoad (Trader & CEO of THE STOP HUNTER) is one of the UK’s leading technical analysts, specialising in Japanese charting methods and systematic trading systems. He is also a lecturer for the Society of Technical Analysts (STA) in the UK.