Technical Analysis – How to Use It for Big Profits
By: kelly price | Posted: 17th April 2007
Technical analysis is the most effective way to make money in online FOREX trading, or any other market – Here we will show you why it is so effective and how to and avoid common errors.
So firstly, why does technical analysis work?
Let’s look at how investors determine price and the equation for predicting market movement:
Fundamentals + Investor Psychology = Price
The important advantage for traders using technical analysis is that it assumes all fundamentals are quickly discounted in the price.
You can ignore all the news and simply assume in today’s world of instant communications that all fundamentals show up instantly.
Technical analysis however does something more important:
It shows you how investors view the fundamentals and takes into account the emotions of the participants.
Think about it:
The price of anything is determined by people – We all see the fundamentals, but we all draw our own conclusions of what the value of anything is.
By looking at charts we can see both the supply and demand fundamentals and the way they are viewed.
The critical advantage of technical analysis is that it allows you to study both of the above at a glance.
Human nature is constant and the emotions of greed and fear cause repetitive price spikes, that can be traded for profit.
All short term price spikes tend to be caused by human emotion and can be traded for profit.
So what do you need to be careful of?
While human nature is constant and technical analysis works, it cannot be reduced to a science:
It still remains an art and although charts can give you reliable patterns they do not:
Always allow you to win.
They will however put the odds in your favor and allow you to trade with the odds on your side.
Technical Analysis is an odds game
Just as the penalty kicker in football does not score every goal, you won’t win every trade.
But, just like the skilled penalty kicker you will score (win) more times than you lose if you practice your art.
Technical analysis is simply, an art that you can use to put the odds in your favor.
In the next part of this article we will look at how to practice your art and the indicators you need to incorporate into your analysis to help you make big consistent profits.
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Tags: science, game, conclusions, supply and demand, kicker, human nature, glance, odds, emotions, investors, participants, way to make money, forex trading, human emotion, greed and fear