Thousands of ordinary people have made millions in the past couple of years using technical analysis to execute profitable financial trades & investments.
Table of Contents
What Is Technical Analysis & How Does It Work?
Technical analysis is the study of financial markets, primarily through the use of price movement. It involves analyzing historical price patterns. Historical data can be found on good and reliable charts provided by platforms such as TradingView. These charts mainly give you three pieces of information; Price, Time (dates), and Volume. As technical analysts, we use this information to come up with strategies in which we can make money in the market.
In this article, I am going to reveal exactly what technical analysis is, its limitations, and how you can use it to make money. Whether you are a beginner or advanced trader/investor, you will be able to improve your analysis skills by implementing the information in this article.
Below is an example of a Bitcoin/U.S Dollar (BTCUSD) Chart
As technical analysts, we make the assumption that all information is reflected in the price of an asset. So whatever is happening in the world which could possibly affect the price is reflected in the movement of the price. Therefore we don’t need to know why the price moves, we just need to know that it does. The assumption here is that human psychology leads to repetition of the past. No matter what changes in the world or in the market, humans are still governed by the same emotions. Because of this, we are able to find patterns and inefficiencies in the market, and as traders, we aim to profit from this.
Technical analysis is not absolute. It is a common misconception that technical analysts are able to forecast price movement. This couldn’t be further from the truth. Technical analysts actually use probability to determine price movement based on historical data and human psychology. This leads to the probable repetition of the past and that all information is reflected in the price. Therefore technical analysis is not an exact science but more of a combination of art, science, and a bit of common sense as well.
What Technical Analysis Does Not Tell You
Technical Analysis Limitations
1. How to protect your capital: Just because you have a good idea of what the price is likely to do doesn’t mean that you know how to size your positions or manage your risk. There are a few other skills required to protect and grow your capital.
2. How to Grow your trading portfolio: Using Technical Analysis enables you to know what the price is likely going to do. However, managing your emotions and knowing how to size your positions is essential. These are skills required to perform good profitable trades.
3. What strategies work in which markets: Technical analysis alone does not tell you which strategies work in each market. One needs to combine technical analysis with other skills to be able to figure out which strategies are viable for each market.
4. When to stop using a trading system: It is important to know how to choose a trading style/strategy that is suited to your personality.
There are other skills required to use Technical Analysis effectively in financial markets. If you take anything from this post, just always remember to “Protect, Preserve & Grow” your capital. This will be a good base to ensure that you make successful trades.
Technical Analysis Misconceptions
A lot of new traders tend to think that performing technical analysis and making money are the same. This is not true, technical analysis is just a skillset or tool that is used by traders to forecast how they can make money in the financial markets.
There is no secret or magic strategy that instantly leads to success. A lot of people tend to think that there is a magical strategy that will instantly start making you money in the markets. It is not that simple. If it were, everyone would be able to make money using technical analysis. To be successful, you just have to combine technical analysis with other skills such as fundamental analysis, emotional intelligence & risk management. There is no shortcut in this game. With the right skills, practice, and experience you will be on the right pathway to success. Trading is not a get-rich-quick scheme, however, if you already possess some of the required skills to execute good trades, you can get rich very quickly.
There isn’t one strategy or formula when it comes to making money through trading. There are many multiple different strategies and styles which can make you money in the market. The only thing that can decide if something is viable or not is whether your strategy can consistently make you money over a long period of time. Nothing else will tell you what style is good or not.
How To Make Money Using Technical Analysis
To consistently make money in the markets a trading system is required. The components of a trading system include:
Psychology: Without the mental framework to execute your trades, even the best system in the world is useless. We are the ones who decide what we do with our portfolio. There is no boss to tell you off when you are slacking. No one will be there to stop you at any moment from completely deviating from your chosen system which can cost you money. Small things like a little bit of panic or greed can force you to take profit later or move a stop loss. These things can completely destroy any potential profits your system may give you. It may seem obvious and most people think that they are not susceptible to these emotions. This is the absolute most important part of any system/strategy.
Risk management: All systems face losses. Without sustainable risk management, a system will likely be wiped out before it can make money. Most systems win about 40 to 60% of the time. There are deviations from this but generally, we can assume that most traders make 40 to 60% of their trades winners. That leaves 40 to 60% being loses. Therefore if you don’t have a good risk management system in place, your losses will wipe out your account and you will not be able to reap the rewards of a working strategy or system.
What Does Technical Analysis Help With
The Entry: Identifying the right market conditions to enter a position. Every trade has a point where you enter the market and technical analysis helps with this as you can see the current price trend by using historical data. If you’ve got the right strategies in place you will be able to identify where to enter the market and if you have good risk management skills, you will be able to pick the best entry at the lowest risk.
The Exit: Exits are used to maximize winners & minimize losses. Just like the entry, every trade has a point where you exit the market. Technical analysis helps with this if you have a good strategy or system in place.
Final Thoughts
Technical analysis will help you develop a hypothesis for entry and exit strategies. It will also help with developing your physiology. When you understand what you are doing and why you are less prone to emotional mistakes as you will be mentally confident in what you are doing.
Next Step = Take Action
If you would like to learn more about Technical Analysis, I would highly recommend that you start by simply enrolling in this “Cryptocurrency Trading Course for Beginners“. Get it for 50% OFF for a limited time only! Use the promo code: PBTRADING21 at checkout.
This Online Course Will Reveal How You Can Start A Successful Trading Journey Using Technical Analysis.
Once you have completed this course, you will have a good foundation on how to trade Cryptocurrencies. You will also be equipped with profitable Technical Analysis Strategies.
