Technical analysis is a valuable tool for traders, which is why its tools are provided by all trading platforms. The way in which the technical analysis is done, i.e., the way in which one will probably compose, the trend lines, the support or resistance levels, and the technical indicators, to compose his strategy, varied. What one will need to keep in mind when formulating a strategy based on technical analysis is that there are no magic tricks or indicators capable of ensuring continuous profitability. What a trader will need is to have a framework to keep in mind when creating a strategy based on technical analysis.
In this article, we will create this framework based on five points.
1. Time has more than one frame.
When creating a technical analysis model, for short-term trading that involves a few minutes to a few hours maintaining a trading position, it seems reasonable to focus on analyzing the time series that relates to the time frame of a day. However, the technical analysis is based on the analysis of time series that are not independent since in essence each short-term time series is a part of a larger time series and is therefore inextricably linked to it.
This means that when we study and create a model based on the time horizon of a day it is necessary to move away from this time frame also focusing on, for example, what has happened in the last three days, the last week, and possibly the last month in the price and the trend of the financial instrument we are studying.
In this way, we will draw invaluable information to see the big picture and to better assess the short-term trend, and the important points of a trend change as well as the levels of support or resistance.
In practice, if we have received a signal from a moving average in the time series of hourly charts, this signal is very strong when the same moving average gives a corresponding signal in the time series of the daily charts. In fact, if the hourly signal is the same as the daily signal, then the indication is quite secure. Otherwise, the indication is unsafe.
In conclusion, if you want to trade for short periods of time, increase the analysis time, which means study over a longer period of time in the chart of the financial product that you intend to trade. Then reduce the time frame to the initial time period to proceed to the short-term trading.
2. The support and resistance lines are areas and not thin points of lines.
When analyzing support and resistance lines in the chart, it is best to think of them, as general areas of interest in selling or buying, so it is possible to trade there. The important thing is to see them as areas, and not as thin points of a line, which indicate absolute individual prices. Consider that trend lines similar to yours have been designed by other traders who will place sell and buy orders in a price range that does not coincide with your own line. So they can basically buy in a support area that is ultimately defined by a price zone near your line, support, or resistance.
Therefore, when designing a support or resistance line you need to be flexible when the price of a financial product breaks that line. Set a price margin, and/or a time margin by creating confirmation filters to avoid false breaks in support and resistance levels.
It is true that if the support level is associated with the stop-loss order, by setting a price margin or a time to confirm the price break of the support line, it is likely to record greater losses. However, on the other hand, you will avoid a useless exit from your position which may become very profitable after a fake price break.
Similarly, if in a buy position, a resistance level signals a buy signal, by setting confirmation margins, in price and time, it is indeed likely that you will get this position at a higher price. On the other hand, this filter in the price and time, will make the signal more reliable and therefore will increase the chances of the position becoming profitable.
3. Not taking a trading position in the market is also a trading position.
There are many traders who, by studying a chart of a financial instrument, such as a currency or commodity, who like and feel safe with it, try to look for a trade, as they believe that they simply have not yet located this trade.
They basically force the trade by looking for a good reward-risk ratio for each chart they analyze. However, the reality is somewhat different. It is better not to trade and try to make money when forcing a trade because it is more likely that you will lose money from this trade.
You do not need to be constantly in the market. Nor to abstain for no reason. Simply put, when you do not have a trading position you need to know why you do not have a trading position. If you understand the reasons why you have no trade position, then in reality you have a trade position.
In other words, if you do not see a good potential trade that fits your criteria for locating a trade, just avoid it and move on until you find the trade that fits your criteria.
4. The technical indicators are complementary to a technical analysis model.
The use of technical indicators cannot be the main criterion for the purchase or sale of financial products. Technical indicators are valuable tools, but they should be used mainly to confirm an assessment we make.
In technical analysis, the primary goal is to develop the ability to analyze charts so that a trader can trade based primarily on the price movement of a financial product.
In essence, the most important thing for a trader is to be able to analyze a chart without the use of technical indicators. After, based on the price analysis, receive some clear signals for buying or selling, then look for whether these signals are confirmed by technical indicators. In this way, a trader takes advantage of the full potential of the technical indicators as he distinguishes which are the indicators that really satisfy him. Thus, he will understand the importance of each indicator so as not to misinterpret them.
In conclusion, traders should, when designing a technical analysis model, focus on the price formations of a financial product, and as soon as they receive signals from these formations, use the technical indicators to confirm the signals and improve their model.
5. Avoid the one-dimensional approach.
Each model can offer excellent performance if satisfied with market conditions. For example, technical analysis models that look for a trend in a financial product perform extremely well when there is indeed a market trend for that product. However, when there is no trend in the market of this product, their performance is not good since in this case, it gives false signals of buy or sale for that product. So, in this case, a trader should have in his toolbox templates that perform well when a market is moving horizontally.
Therefore, the inability of a model to work well in certain market conditions while in a previous period it performed well does not make it useless, it just shows that it is necessary to search and use other technical models that will satisfy different market conditions.
In conclusion. Traders will need to use different technical analysis models, each of which is indicated by market conditions. They just need to have them and use them accordingly.
Once the traders create the framework of the above five points it is difficult to fail when using technical analysis strategies. All they need to do is not to deviate from those points.
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