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Author Topic: Technical Analysis for Dummies  (Read 1801 times)
bassclef
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August 11, 2014, 10:17:12 PM
 #1

The misunderstanding and hating on Technical Analysis, lovingly referred to as TA, is incredible. People just don't get it. It's based on three things:

1. Market action discounts everything.
2. Prices move in trends.
3. History repeats itself.


1. Market action discounts everything. Unless you get this, then you won't understand much about TA except that it's simply lines on a chart. It means everything that can be reflected in the market, IS reflected in the market. Thousands of market participants all over the world, each buying/selling for different reasons, reading the news, responding to FUD, trading on insider information, etc etc etc, affecting supply and demand thus moving the price around. In this way (the fundamentals of the asset being reflected in the price) Technical Analysis includes Fundamental Analysis by default. Ever see the market start to move inexplicably before big news comes out? This is because of this rule. If you can catch this move using TA, then it gives you a leg up over those who rely solely on fundamentals. Of course the technical analyst should be cognizant of both, especially in such dynamic markets as digital currency.

2. Prices move in trends. If you're dubious of rule #1 and don't understand this rule, there's no point in reading any further. The purpose of chart-reading and applying technical indicators is to PREDICT TRENDS. That means identifying when they start, how long they may last, and when they might end. A trend that is set in motion is likely to stay in motion until it reverses. The trend is your friend until the bend at the end. As a profitable trader, you should always be on the correct side of the trend. Proper chart analysis can give excellent clues to when old trends will end and new ones are likely to begin.

3. History repeats itself. Part of what we're doing with TA is studying human psychology. Who is the person behind the keyboard? What is he thinking? Is he bearish or bullish? Trading the markets is certainly an emotional event and that is reflected in the price/volume action. Is the volume on a most recent move high or low? Are there more sellers than buyers after a particular event? Did we fail to break a price ceiling multiple times on decreasing volume, indicating more bears than bulls? These are the questions analysts ask themselves. They don't look for pretty pictures, they look for patterns that reflect human psychology that have worked in the past and are likely to work in the future.

There it is. Hopefully this sheds some light for those who are doubtful. The thing is, TA doesn't promise anything except a better understanding of how markets work. And it's all subjective. It's up to the analyst to create a strategy that is right at least 51% of the time and includes proper risk and money management.
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oda.krell
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August 12, 2014, 12:15:10 AM
 #2

Very nice write-up. Wholeheartedly agree with everything you say.

Except the last line: it's a technicality, but an important one... the goal isn't to be right (i.e. profitable) 51% of the time, which seems to imply that a majority of your trades need to be profitable. In fact, lots of traders incur (small, controlled) losses in a majority of their trades, and it is the few, highly profitable trades that generate their total profits. /nitpick

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August 12, 2014, 08:57:27 AM
 #3

Nice write up, I went from being obsessed with fundamentals to seeing how all encompassing TA really is. TA is the backbone of any analysis I do or read about now.

Too often 'fundamentals' are equated to 'stories' that may be true or false with no way to verify.




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InwardContour
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August 12, 2014, 04:24:29 PM
 #4

Nice article, currently there are too many people who thinks that technical analysis is unuseful only because they were lucky with trading the last months...
keithers
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August 12, 2014, 05:58:53 PM
 #5

Nice article, currently there are too many people who thinks that technical analysis is unuseful only because they were lucky with trading the last months...

That's the funny thing about trading...99% of people who trade would tell you that they are successful.  80% of those people probably have no idea what they are doing, but just happened to hit the timing correctly..
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August 12, 2014, 09:11:53 PM
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Nice article, currently there are too many people who thinks that technical analysis is unuseful only because they were lucky with trading the last months...

That's the funny thing about trading...99% of people who trade (who writes "I trade")  would tell you that they are successful (The remaining 80% of traders do not write about their losses / gains).  80% of those people probably have no idea what they are doing, but just happened to hit the timing correctly..
FTFY
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August 12, 2014, 11:54:34 PM
 #7

1. Market action discounts everything.
There is two enterpretations of this statement: weak and strong. The strong one means "each news causes instant and precise change in prices". That is, the effective market hypotesis. Were it true, the charts would look like staircases, without trends and oscillations. So, it is obviously wrong.

The weak interpretation of this statement is "non-effective market". That is if, say, China bans bitcoins Smiley, the prices would fell, but they would fell too much or not enough. Market will react, but with some error. Since the statement doesn't tell us the size or even sign of this error (too much or not enough), it is as useful as it's opposite: "market doesn't discount everything". Which we can observe right now: stream of "everything" is coming, but market does seem to ignore it.

tl;dr; Depending on interpretation, the statement "market discounts everything" is either false or useless. Smiley

[/trolling] OK. It's useful, but it's not that easy to use as it may seem.

Fairplay medal of dnaleor's trading simulator. Smiley
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August 13, 2014, 12:09:18 AM
 #8

tl;dr; Depending on interpretation, the statement "market discounts everything" is either false or useless. Smiley

[/trolling] OK. It's useful, but it's not that easy to use as it may seem.

there is a constant push and pull from different forces. while a piece of bad news might cause a drop in price, one can never know when something is fully "priced in". like the China bans -- that was a cloud over our heads for months (still is, actually), but the market eventually seemed to let it lie. but how do you quantify that, considering the thousands of other fundamental and technical signals at any given time?

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August 13, 2014, 12:57:22 AM
 #9

Technical Analysis for Dummies

At first glance I thought you'd simply omitted the word "is" from the thread title.

 Cheesy
bassclef
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August 13, 2014, 07:22:13 PM
 #10

Thanks for the support guys.

As a musician, I see TA (or a general understanding of how markets work) as music theory. In college I hated theory but it's integral in being able to read a score, put the pieces together and properly recreate what the composer intended. And don't get me started on piano scales... ugh. But you trudge through and learn all major/minor variants because it makes you better on the other side. In the same way learning market theory is helpful: Even if you don't use all of it, you get how it plays into the bigger picture.

Plus it helps protect your investment... when the price drops you can glance at a chart and not freak out and panic sell.
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