Intro – Technical Analysis
Among the two prominent ways of studying the market are technical and fundamental analyses. Technical analysis involves examining the graph of a given security and making trade decisions based on it. Traditionally, conducting technical analysis is done using various tools such as trend lines, key zones, indicators, and so forth.
Another Perspective
I met a soon-to-be quantum trader a few months ago. Upon our first encounter, he asked me, “What type of trader are you?” I replied, “I make my decisions purely based on the technical aspect of the market and I have five years of experience.” With a quick smirk, he added, “Oh, so you draw doodles and lines on the graph?”
Technical analysis is not about drawing zones and lines. It’s about understanding the ideas behind price behaviour and making calculated decisions based on that. After years of trading, I have developed a sense and intuition that helps me make decisions without needing to highlight lines and zones on my charts. Just by looking at a graph, I can preliminarily forecast what could happen and how the scenario might unfold.
I’m not saying that I don’t use technical instruments. Rather, I’m implying that I don’t have to, since patterns tend to repeat themselves. Having traded the same two securities and timeframes for years, it becomes relatively convenient to predict outcomes without mapping anything on the graphs. However, the mini touches and notations give a good idea of where I want to enter and exit, so I still benefit from using technical tools.
Everything Needed
There are two types of technical analysts: those who overload their charts with numerous analytical tools and those who keep things simple and minimalistic. As I noted earlier, the main purpose of conducting technical analysis is not to create a Picasso-style painting. Rather, the idea is to understand the market structure and what the price is indicating before forecasting an upcoming move. Overloading our charts with too many elements and configurations blurs the overall picture and overwhelms our brains with unnecessary information. As a rule of thumb, remember that quality should be prioritised over quantity.
In our practices, we use only the following technical tools:
- Key zones
- Trend lines (occasionally)
- The Fibonacci retracement tool (predominantly the 50% Fibonacci level)
By utilising these instruments, we can identify and map crucial regions of entry and target, aiding our decision-making within the market.
To orchestrate an A-Z decision-making process and illustrate a live-market example, refer to the next subchapter.
Putting Pieces Together: Conducting a Technical Examination
In our decision-making practices, we actively utilise technical analysis. More precisely, we use what we call the ‘3-step methodology’, the principles of which are described as follows:
- Initially, we read a given chart like a book and try to grasp the idea behind the price behaviour.
- Next, we plot all important zones of decision and sketch a game plan.
- Lastly, we take a calculated guess with a 1% exposure of our total capital.
Textbook-wise, here is how it looks:
Now, to bring a live-market instance, let’s look at the Daily-timeframe scenario that unfolded on USD/CHF within the date range of [05/2023 – 07/2023].
As observed, we used the ‘3-step methodology’ to identify and benefit from a trade opportunity. Firstly, we identified the direction of the trend. Next, we mapped all important decision zones and sketched a game plan. Finally, we made a calculated entry, profiting from a 1:3 risk-reward opportunity provided by the price development.
Conclusion: the Trading Salad
As always, we like to emphasise that there is no black or white in trading. There is no one-size-fits-all formula for success, as everyone has their unique path to the top of the mountain.
Trading is much like a salad. Only by mixing a variety of ingredients – technical edge, psychological adaptability, and a risk management plan – can we achieve consistent profitability in the long run. The technical aspect is just one ingredient, and other ingredients should be equally prioritised without exception.
