Understanding the Logic Behind Technical Analysis

The logic behind technical analysis is to find the proper set of tools and indicators to help you make potentially profitable trading decisions. Some people when they use technical analysis get caught in the hype of finding the one “perfect” indicator. Don’t be that guy. What they should understand is that these tools do nothing more than calculate data from the past and presents it into information to help us find the next potentially profitable trade. So here are some rules to remember: 1. Use it where it fits If you are a day trader looking to capture intraday swings it wouldn’t make much sense to use daily charts to plan your trades. You would want to look into timeframes that fit your objectives, which in this case would be 30 minute chart, 15 minute and 5 minute charts. These timeframe will help you get the job done. Use the tools that best fit for the job at hand (i.e. your trading style and strategy). 2. Use multiple tools and techniques together When scanning for profitable trades it would be wise to consider using different types of tools to help you make better analysis. The reason they were made were to be used together. There are many different types of indicators out there for a reason. Use one to give information on what part of analysis needed to make a solid trade decision. For example, if you are swing trader looking to capture daily swings, you would probably want to use a tool to tell you what is the current direction of the trend. Then you it might also serve you well to use a tool to let you know whether this particular trend has had it run or if it still has a ways to go. Combine this analysis with your multiple timeframe strategy and you will be well ahead of the competition. 3. Discard what is not useful While Bruce Lee was creating his own martial art discipline, Jeet Kune Do, he studied every fighting style. His personal goal was to create the most efficient form of fighting possible. While he was studying these different styles of martial art he would come across a few techniques that would complement his particular discipline of fighting. Anyone who knows anything about the martial arts knows there are a plethora of moves that can be used to attack. Far too many to incorporate into a solid strategy to use in combat. So what did he do with ones that didn't complement his style? He would throw them away. You should feel the same way when build your own technical analysis strategy. Find the tools and techniques that enhance and complement your specific style and situation. You wouldn't wear clothes that don’t fit (would you?) so there is no reason to use tools that don’t fit for you either. The logic behind technical analysis is simple, oftentimes common sense. But in order for one to put it together he or she must understand how the tools works as well as when and where to use it. Don’t use a phillips screwdriver when you need a monkey wrench. Follow these rules you’ll easily have an edge on how to successfully apply technical analysis.