Last week I began our blog series with a look at the history, theory and philosophy of technical analysis. This week we move on to look at 20 rules that you should build into your technical analysis. It is by no means an exhaustive list; there are many more technical analysis rules than this and there will also be rules that you create yourself. However, those presented here are a good foundation that you can apply to your analysis and build on. Some rules may appear, at this possibly early stage in your interaction with the subject, as both peculiar and confusing. Stick with it though, because during the remainder of this blog series, the use of these rules will become a lot more apparent and understandable.
One of the reasons I believe technical analysis can be such a great tool for traders and investors is its subjectivity and flexibility. It allows the user to come up with their own opinions, angles & thoughts on a particular market very easily and allows for the development and enhancement of existing and new tools to reflect their own trading approach. Some may argue that this could also be a weakness, but with a solid grounding in the subject it can be quickly seen how you can turn this tool to your advantage. It's subjectivity though, does allow for a wide scope of potential outcomes from any individual piece of analysis but underlying this analysis can be found a set of technical analysis rules that you need to know.
Rules you need to know
Remember from the Part 1 blog where I said that technical analysis is built on 3 pillars? Well, these should always be the first three generic rules you take with you into your technical analysis:
1. The price is the price - market forces have got it to this point - supply and demand are built in real-time, saving you the need to do a lot of fundamental analysis leg work. As a 100% pure technical analyst that is all you need to know.
2. History, to a certain extent, does repeat itself - look for patterns (ones that continue or reverse), trends that happen time and time again. Certain markets have more obvious repeatable historic patterns and performance. Use the appropriate tools to measure and forecast this activity.
3. Determine the trend and trade with it. In…
