The best way to trade any financial or commodity market is by using technical analysis.
Here we will contrast it with fundamental analysis and why a technical approach is best.
It is simply defined as the study of price action through the use of charts - for the purpose of identifying price trends.
It's not a science, it's an art, and it works!
Why? The reason technical analysis works is because it reflects human psychology.
What about supply demand fundamentals, you may ask - well it reflects them to. Let's take a closer look.
Technical analysis uses the following equation:
Market Perception (trader psychology) + Fundamentals = Price Action
All technical analysis does, is to put forward the idea that all fundamentals are quickly reflected in price action (and in the 21st century with our advanced communications this is true as market news is flashed across the world in a split second) - therefore it simply concentrates on the price action.
The above is simple but leads to a compelling conclusion:
Price action reflects ALL the fundamentals.
There is however something else technical analysis does which is just as important:
It reflects how the participants in the market actually perceive the fundamentals.
Traders who study fundamentals claim that you can't use technical analysis - because you need to know and study the fundamentals, to know where price action will go next.
This is not true!
Most of the largest price moves in history have occurred with little or no change in the fundamentals.
Markets are generally most bullish at market tops and most bearish at market bottoms - and these turning points occurred with little or no change in the fundamentals.
Think of the 1987 crash. The market plunged when the fundamentals were at their most bullish.
Why Technical Analysis Works
Quite simply Human psychology was at work and technical analysis factors in how the participants perceive the fundamentals as well as fundamentals themselves.
Using technical analysis allows you to get a clear detached view of the market you are trading and see the reality as it is, rather than reading or listening to the opinions of others.
Keep in mind that 90% of traders lose money - because they're influenced by greed and fear and this is driven by market news.
The more bullish the news the more greedy people become and this has never changed because people's emotions are constant.
Of course, eventually they push the price so far away from fair value that a crash occurs and their caught and take losses.
Technical analysis allows you to see prices in historical terms and also the greed and fear present in bull and bear markets.
Charts therefore allow you to see the reality - and that's a huge advantage.
Technical analysis makes the following assumptions:
1. Markets Discount
All fundamentals show up quickly in the price action.
When you use technical analysis, you are studying the fundamentals as they are - not trying to guess their impact.
At the same time you're studying human psychology as well.
2. Trends Persist
Currency technical analysis can prove this - just get out a chart of any currency, and you'll see long term trends - many lasting for several years.
3. History Repeats
The basis of technical analysis is that what has happened in the past will happen again in the future.
This is why it's so effective.
Human behavior tends to repeat itself.
As price patterns on charts reflect shifts in human psychology, we can assume that certain patterns and trends will repeat themselves.
Using technical analysis
Your aim when using technical analysis is to catch, and hold the longer-term trends.
Human behavior does repeat itself - but humans can be unpredictable as well and that's why charting is an art not a science.
Always be skeptical of theories that say they can predict with scientific accuracy - they can't!
If they could, we'd all traders would know the price in advance - and then of course there'd be no market.
Using technical analysis means, you can get the odds on your favor - and make big long-term profits.
Trade the Odds
In gambling, the aim is to get the odds in your favor and bet when they are.
In trading, your aim should be to trade only when the odds are in your favor you make a trade.
You won't win every trade - but neither can great football players score from every kick at the goal.
Technical analysis is the best way to trade today's markets and with a simple robust system focusing on the big trends you can make great long term capital gains.
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