Technical analysis is the study of charts and indicators as a guide to price action. The idea is that a person can look at historical price movements, and based on the price action, can determine on some level where the price will go. By looking at charts, you can identify trends and patterns which can help you find good trading opportunities. The important thing you will ever learn in technical analysis is the trend! Many people have a saying that goes, The trend is your friend. The reason is that you are much more likely to make money when you can find a trend and trade in the same direction. Technical analysis can help you identify these trends in its earliest stages and therefore provide you with very profitable trading opportunities.
Trading is more of an art than a science. You will learn to take trades based on good probability but not on a certainty that you are right. Good technical analysis reads market action and merely predicts a high likelihood that the market is going to do something.
The market does not response to the charts and in fact they do not respond to similar repeating market forces in perfectly predictable ways. Therefore a certain amount of flexibility in the application and interpretation of technical tools is essential. Losses are part of the game.
You will learn to keep the odds in your favor by:
- Refusing to take a position when the signals are weak or conflicting
- Taking calculated risks; no risking too much on any one trade
- Knowing the target and exit strategies before getting in.
- Setting stops that limit your losses
- Taking profit according to your plan; not being greedy.