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The Power Behind A Good Technical Analysis

Fri May 21 2021 08:47
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All traders want to use technical analysis to gain many benefits from their trading portfolio. But they want to know the power behind good technical analysis. What drives technical analysis? What makes it more profitable? All these questions pop up in the mind of a trader. 

A trader needs to find out what is the real power behind technical analysis. Because if your technical analysis is not that effective, then you can make it more effective. You just need to get that power and add it to your technical analysis strategy. 

Deep dive into good technical analysis 

So in this post, we're not just going to talk about a single trading strategy. We are going to talk about the factors that empower technical analysis. Knowing all of these factors can turn all trading strategies into effective strategies. Your technical analysis will start showing you better results. 

You will find that your trading improves and you gradually increase your profits. But you can only do that if you add real power to your technical analysis strategy. So, without wasting any more time, let's get to the point. 

Factors That Empower Technical Analysis 

First of all, we need to know all the factors that empower technical analysis. If we develop a technical strategy and give it to two different traders. Then you will find that there will be different profit and loss results. Because these two traders will use technical analysis differently. 

So whether it's a forex market trader or a stock trader, let's look at these factors.

#1. Psychology 

Psychology plays a big role in financial trading. No matter what market it is, from commodity trading to stock trading, you will find its influence everywhere.

But there are different psychologies working behind technical analysis. Below are various psychologies that are behind technical analysis. 

Human Psychology 

The most powerful psychology is human psychology. This is because you are dealing with other people in the market. You need to understand trading psychology. Because it goes beyond setting stop loss or making buy or sell actions.

Market Psychology 

Candlestick or chart patterns can help you grasp market psychology. Using trading software or online trading systems will also help. The entire market has a common psychological effect.

#2. Technical Indicators 

It is not only used to find out the bearish or bullish market sentiment. There is much more you can do with technical indicators. Below are some common types of technical indicators.

Trend Indicators 

If you love trend trading, then you need to find out uptrends and downtrends. For this, you need to use trend indicators. The whole market evolves around the trend metrics.

Volatility Indicators 

Volatility indicators are used to determine volatility. We all know that volatility and liquidity are common but very influential factors to consider.

Momentum Indicators 

Momentum is also an important indicator. Many technical indicators fall under this category.

Volume Indicators 

Price and volume are the two basic but important factors that any technical analysis strategy deals with. These two factors are important because historical data related to them is derived and used. Thus, volume indicators also play an important role in TA.

#3. Trading Experience 

  The experience of a trader also plays a major role and it gives better results. There can be different results of the same technical analysis strategy if one trader has more experience than others.

In this arena of automated trading and algorithmic trading, TA has become more complex. Undoubtedly, technical trading has become easier with many trading software. But there are still complexities. 

Charting Ability 

Charting skill of a trader is the most important skill required for technical analysis. Without charting skill, a trader cannot read charts perfectly.

Decision Making 

Decision making is also a key skill that a trader needs. They need to make decisions quickly in the trading market.

#4. Planning & Discipline 

Planning and discipline are not only associated with technical analysis. But it is associated with profitable trading. Nowadays, there are many resources for advanced trading, but you still need planning and discipline. Below are the most important elements you need.

Trading Plan 

To make your technical analysis strategy successful, you need a proper trading plan. List all your tasks in your trading plan to get benefit from it.

Technical Analysis Strategy 

Your technical analysis strategy is also part of your planning or trading plan. You need to develop a technical analysis strategy before you enter the market.

Technical Indicator Alternatives 

Technical indicators sometimes fail. In this mobile trading arena, you need to use multiple technical indicators.

#5. Technology 

Technology is also important to consider. It empowers technical analysis. You can see that a few decades ago, technical analysis was not that effective. But now, with the help of advancement in technology, technical analysis has become more effective. Several technologies are supporting the technical analysis. The following are the most important technologies.

Platforms

Trading platforms are important and every day they are updated with exciting new features. All these features help a trader to make technical analysis more effective.

Tools & Resources 

Trading tools and resources are always there for the convenience of traders. They can also help you to make your technical analysis strategy more effective.

Softwares 

There is also other software. These software are calculators and analyzers. You can also use such software to make your technical analysis effective.

Things That Impact Technical Analysis 

You have gone through all the strengths of technical analysis. Now you need to go through the weaknesses. Beginners need to go through these factors that negatively affect technical analysis. These factors can be seen in almost all financial instruments.

#1. Technical Indicator Failure 

The first thing that affects the results and accuracy of technical analysis is the failure of technical indicators. You need to understand why a technical indicator is not working accurately. Below are some of the issues that cause technical indicators to fail.
  • Lagged Signals 
  • Lead Signals 
  • Error Results 
  • Mismatch Results 

#2. Lack Of Knowledge 

If you are trading currencies and have no experience in stock trading, then you might face problems. Lack of knowledge is always a big problem for traders. You can enrol in a trading course to get more knowledge and experience. 

There are many trading services that can help you. Below are common problems that affect TA and its accuracy. 
  • Improper Planning 
  • Wrong Resources 

#3. Inappropriate Technical Indicators 

If you choose the wrong technical indicator, your technical analysis strategy will be less effective. You cannot get many benefits from such technical indicators.
  • Incompatible Trading Platform 
  • Incompatible Financial Market 

#4. No Discipline 

If you have no discipline or planning, you will also suffer losses. For a little bit of delay or backlog will put you in loss. Try to be disciplined before you enter the market.
  • Lag In Decision Making 
  • No Homework 

Summary 

There is no single force that makes technical analysis effective and accurate. All these factors are important and as a trader you need to pay attention to them.

It is never advisable to neglect any of these factors. From trading experience to technical indicators, you need to pay attention to all these factors.
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Forex
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