We are going to round off our introductory technical analysis series, in the last three articles, by putting together what we’ve learnt so far. It’s fine having all this new knowledge, but how do you use it in the real world? Technical analysis is a multi-talented tool that can be used for many things in your trading – not just direct price analysis. So this week, we are going to look at how you can use technical analysis to design, build and implement a trading strategy. In our final two articles, we will see how you can apply technical analysis in your risk and trade management and how you can use it to improve your results!
Strategy, design & implementation: What are your options?
At a higher level, if you’re going to integrate technical analysis into your trading, I believe you’ve got three main choices: 1. Trade purely technically. 2. Use technical analysis to aid your fundamental analysis. 3. Use it to trade and develop systematic models.
One of the biggest factors to influence what you are going to trade, will be the liquidity of the market. Technical analysis, as a stand alone trading tool, works very well when the markets are liquid i.e. high turnover. So this makes markets such as FX, Indices and some of the larger commodities and equities an attractive proposition to deploy technical analysis in. If the markets are less liquid e.g Lean Hogs or an AIM stock etc, then I like to use technical analysis as a timing tool for entry and exit and risk management and rely more on fundamental, behaviour and sentiment tools as the driving factor behind my trading strategy.
Another often overlooked factor is your own personal circumstance and objectives. Technical analysis is brilliant for creating trading opportunities and strategies around your lifestyle. You can speed up or slow down your trading as much as you like by utilising the many ‘time frames’ available to trade. Or you can even get rid of time altogether and concentrate on pure price movement using charts such as Renko, Kagi and Line Break.
The immense pace at which technology has developed over the last decade, and tools have become available in the market place, also throws out another option – systematic trading. This is easier than you think and has many advantages. If you have…
