HISTORY REPEATS ITSELF

In the Western world, markets have been charted for a hundred years or more, and certain patterns have been observed to occur frequently under similar market conditions. These patterns reflect the human response to situations, as human psychology does not really change. As the patterns have worked well in the past there is no reason to doubt that they will do so in the future. The driving forces behind markets are greed and fear. Under the influence of these forces human nature becomes less rational, and greed will drive prices to unsustainable levels, while fear will depress them below any reasonable valuation. One thing we have learnt is that the same mistakes and the same decisions are made time and time again. A depressing thought, but it provides the basis for technical analysis.

Technical analysis therefore should be used as a tool, not a black and white bull/sell signal. It is a subjective component to trading, there are no dead cert patterns and it is more of an indicator/confirmation practice than a precise clear cut discipline to success.

Although it can be incredibly detailed, technical analysis is not overly complicated. It is basically the ability to read charts and make practical use of them in trading strategies, and it would be fair to say that the majority of investors from institutions to private individuals will use it in some form before making trading decisions. The reason we study technical charts (or fundamentals) is to eliminate uncertainty as best we can, thus we reduce risk and increase our chance of taking profit.

People often go wrong in using technical analysis because they adopt one procedure for making trading decisions without developing an understanding of what the information really provides; how this information can be applied to a given situation; and whether this particular decision fits in with your trading plan.

By defining your use of technical analysis and incorporating it into a trading plan you can build a limited number of indicators which suit your style of trading and have best value to you and the market you trade. By having a limited number of technical indicators you will eliminate confusion, and eventually devise intelligent trading strategies. Once this happens you will make informed decisions, identify potentially profitable trades, respect your own risk tolerance levels, and recognize a change in the trend before it is too late.

When you undertake your technical charting practice you will be considering the application of the following points:

• Placing of stops
• Targeting
• Risk/reward ratios
• Entry/exit levels
• Money management

Over time you will develop your own preferences for certain chart types, indicators and time scales to use.