Technical analysis is as old as dirt but it only caught on as a viable trading tool in the late 1970’s – early 1980’s.
When you think about it, a finite number of traders participate in the markets on any given day, week, or month. Many of these traders do the same things over and over in their attempt to add to their bottom line.
In other words, individuals develop behavior patterns, and a group of individuals, interacting with one another day after day, week after week and month after month, form collective behavior patterns.
It ‘s sort of like the annoying commute to work each morning.
You leave at a certain time. You take a route you have determined will get you to your destination in the most effective and efficient way possible. You’re just like thousands of others who have a very specific time to leave their abodes and trudge to their destinations following their own predetermined course each and every work day.
Your behavior and the behavior of all other commuters become part of a collective symphony that plays out every day. This performance can be observed and quantified with statistical reliability.
Once we quantify these driving patterns we are able to identify a pattern and that we need to steer away from the intersection of Union and Gage Dr. at 7:45 AM each morning.
Technical analysis is the way we, as traders, quantify the stock market’s collective behavior into the same identifiable patterns. It is a way for us to identify which charts patterns have a higher probability of profitability than others.
Boiling this down to a nub, technical analysis gives you the ability to get into the mind of the market. It hands you the reins of anticipation to what’s likely to happen next. Based on the kind of patterns the market generated across a previous timeframe, you can read the market’s mind.
Fundamental Analysis vs. Technical analysis
As a method for projecting future price movement, technical analysis turns out to be a far superior crystal ball compared to a purely fundamental approach.
TA requires the trader to focus on what the market is doing right now in relation to what it has done in the past. In contract, fundamental analysis shifts our attention to what the market should be doing based solely on what is logical and reasonable.
Fundamental analysis creates what I call a “reality gap” between “what should be” and “what is.” This makes it extremely difficult to conjure up a plan with anything but very long-term predictions that, even if they are correct, are difficult to exploit,
Whereas, technical analysis not only closes this reality gap, it also provides the trader a virtually unlimited number of possibilities of which he can take advantage. The technical approach opens more possibilities because it identifies how the same repeatable behavior patterns occur daily, weekly, yearly, and every time span in between. In other words, technical analysis turns the market into an endless stream of opportunities with which you can enrich yourself.
Why aren’t all TA Traders Rich?
So then, Obi-wan Kenobi, if technical analysis is so dang good why aren’t all traders who use TA as rich as Warren Buffet, driving Jaguars and wearing Versace. It could be that traders don’t like Jaguars or Versace but it could also be there is more to trading than comprehending technical analysis.
To find the answer to this question, it doesn’t take much digging before our shovel rams into the metal walls of hard … cold … reality. Unlimited possibilities coupled with unlimited freedom to take advantage of those possibilities present a trader with unique and specialized psychological challenges.
Turns out endless possibilities present humans with challenges that they are not properly equipped to deal with. In reality, most of the time we aren’t even aware we are ill-equipped to deal with the psychological challenges.
When we start trading, the unfettered freedom to make our own rules can be as heady as your first kiss on a warm summer evening with the only the moon and stars in the sky.
Of course, there are formalities such as meeting the minimum financial requirements to open a brokerage account and what type or orders are allowed in margin and retirement type accounts, etc. But once we have all the nuisance stuff out of the way and are in a position to actually hit the enter button on a trade, the possibilities that exist are virtually limitless.
The Freedom is Liberating
The freedom is liberating and all of us naturally want it and even crave it. But that doesn’t mean we have the appropriate psychological resources to operate effectively in an environment that has few if any, boundaries and where the potential exists to do enormous damage to ourselves.
The kind of adjustments I’m talking about has to do with creating an internal mental structure that provides the trader with the greatest degree of balance between the freedom to do anything and the potential that exists to experience both the financial and psychological damage that can be a direct result of that freedom.
We’re the Plan in “Plan your Trade and Trade your Plan” – TraderJanie
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