Successful Technical Traders – How to be Successful
For starters, technical analysis is one of the most complicated topic. This is mostly because of the mathematical calculations behind the indicators. For instance, the relative strength index (RSI) comes from a complex mathematical formula involving smoothed or modified moving average (SMMA) and exponential moving average (EMA). However, as a trader, there is no need of understanding the complex mathematics. Technical indicators have been included in most trading systems. For a trader, all you need to do is to place the indicator in your chart, interpreting it, and then placing a trade. Here are the ten secrets of successful technical traders in no particular order.
#1 – Use few Indicators
There are hundreds of technical indicators available in the charting systems. While it is important to understand most of these indicators, the fact is that you should only use a few of these indicators. A problem most traders do is to combine 10 indicators in one chart. This usually presents them with a dilemma on the decision to make when placing a trade. For instance, when sing 10 indicators, what decision will you make if 5 indicators show buy while 5 show sell? Using two or three indicators can help you make the right decision.
#2. Test the Indicators
After identifying the indicators, you will be using, I recommend that you spend a few months dedicated to testing them. Testing the indicators will help you come up with the best parameters to use and in what timeframes. A mistake many people do is to hurry and implement what they read without testing and backtesting. For instance, they will read that an ADX level of 35 is a strong trend and then enter the market based on this.
#3 – Always Combine Technical with Fundamentals
Technical indicators should always be combined with the fundamental tools. This is because the market moves because of a number of factors. For instance, when there is an economic data release, the technical indicators will not provide an accurate prediction. Also, some technical indicators such as RSI will not work during sideways market. Therefore, it is important to know the best type of market to use technical indicators or not.
#4 – Use Multiple Time Frames
As a trader, you can trade different time frames from 1 second to years. The technical indicators used in multiple time frames will often result to different indications. For instance, the Simple Moving Average (SMA) for a Gold chart could signal Buy while the 5-minute chart will signal Sell. A perfect condition – which is not common – is when all time-frames signal the same thing. It is important therefore to compare what different time frames are signalling.
#5 – They Rely on Indicators, not the Naked Eye
This is one of the most common mistakes I see around. Many newbie traders are deceived by their naked eyes. They ignore what the indicators are saying. They open a chart, see its going up, and then open a buy trade. The problem happens when there is a reversal which could easily be indicated by RSI or Average Directional Index (ADX).
#6 – They are Masters of few Indicators.
Successful technical traders are masters of very few technical indicators. They are not jacks-of-all-trades. The benefit of being an expert in a few indicators will help you make better and more accurate predictions. I have a friend who trades using the double exponential moving average (DEMA) only. His trades are accurate most of the times.
#7 – They Accept they are Wrong
Successful technical traders know that they are never 100% accurate. This acceptance is very important because it gives them an opportunity to trim their losses. In trading, no prediction is ever accurate because there is no perfect trader. In the past, we have seen thousands of hedge funds shut down because of poor performance. As a trader, you should accept early that the thesis has failed and trim the losses.
#8 – They Journalize
A journal is a very important that most successful technical traders have. The journal is important in preventing future losses. Warren Buffet, though not a technical trader has claimed that he puts down on paper reasons for buying or selling a company. In my experience, at first, I ignored this and suffered significant losses.
9. They Plan every Trade
Successful traders understand that trading is a complicated business. A simple mistake can lead to significant losses. They therefore take time to plan every trade that they get into. They plan the entry and the exit positions. In every trade that they enter, they plan the expected return either on the upside or on the downside.
10. They Chart
Today, you can find technical signals from different sites. Investing.com does technical analysis and provides the signals in their website. This is good. However, successful traders do the charting themselves.