How to use technical analysis to make money from trading
Fsp Invest Team, 21 May. 2013
“If spread trading has been the trading instrument phenomenon of the past few years, technical analysis, in particular charting, has been the leading way to research the phenomenon in recent times,” says the Ultimate Spread Trading Guide. Read on to discover why mastering the use of technical analysis will help you achieve success when trading.
Technical analysis is the study of price action and behaviour that bases trading decisions purely on historical data. It works in all time frames, from years to intra-day, giving rise to the growing band of day traders who trade minute-to-minute fluctuations.
Now days, the widespread availability of software that specialises in allowing traders to chart and analyse price information as well as trawl markets for the best buy and sell opportunities in equities, indices and commodities is tailor-made for spread traders.
But to fully profit from technical analysis and its ability to narrow choices into a few specific ideas within minutes, you have to understand how it works for you when spread trading.
Tilt probability in your favour with technical analysis
According to the Ultimate Spread Trading Guide, charting is the visual part of technical analysis. It’s used because traders assume that price trends and patterns can be relied upon to provide an insight into the future.
The rise in trading software and financial websites has meant that almost everyone has access to charts of the share or markets they’re interested in.
While to the novice trader most charts resemble a random walk through time rather than anything that could provide any predictive clues, the trick is to “identify trends and price formations to form a logical conclusion about what could happen next,” the Ultimate Spread Trading Guide advises.
Essentially, charting’s about tilting probability in your favour, but also being prepared if prices turn against you. While this is the case, the mistake most novice traders make is to not decide before they put on a trade where their stop loss and target is.
And that’s where charting can help.
Charting helps you reduce risk
Charts are trading fingerprints. They include every buy and sell traded in the market.
This means as a spread trader, you’re able to manage risk by knowing what your maximum loss and profit target should be before you take a position. Charting is ideal for this as it provides a valid market level based on support and resistance levels.
There you have it! Understanding how to use technical analysis will help you achieve trading success.
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