March 25, 2008 at 7:00 am | | Comments 2

Practicing Technical Analysis

If you’ve ever watched the TV show House, you’ve no doubt seen the main character Dr. Gregory House assert his opinions and act on them. He’s an extremely good doctor (at least he plays one on TV 😉 ), but he sure isn’t always right. What I find so interesting is that he’s actually wrong quite often, and yet he saves the lives of his patients/actors.

Dr. House practices medicine. Sometimes he’s right and sometimes he makes mistakes, but he’s always working toward a solution and willing to try multiple methods if necessary to get there. The key is how closely he pays attention to the results he gets. Making a decision is one thing, but setting the ego aside with a willingness to modify the game plan is of utmost importance when striving toward a goal.

Should we be any different as traders? No way. I think as traders, and in particular those of us who use technical analysis, must take the same approach of making decisions, evaluating our results, and then modifying our approach as needed. Our objective is to turn a profit, and there are many ways to accomplish that.

Simply attempting to turn a profit in the market requires that we make choices and accept some level of risk, but that’s only the first portion of the plan. Once that step is completed, it’s time to monitor and evaluate how well our decisions are paying off. When things are progressing as anticipated, we simply have to stick with the plan and patiently let it play out. However, when we aren’t seeing the results we’re seeking, a willingness to go back to the drawing board is a requirement if we want to continue making forward progress.

Technical Analysis is by some considered to be hocus-pocus, but what’s so funny is that technicians will often give fundamentals a similar lack of credit. I view technical analysis as an interpretation of where supply and demand are concentrated, but it is not always an exact science.

A doctor will ‘practice’ medicine, interpreting symptoms to determine the best course of treatment in seek of a cure. Over time, new discoveries are made, experience is gained, and an open minded physician may alter their treatment habits as a result.

The technical trader operates in a similar way. The best methods for gauging momentum can evolve over time, and certain chart patterns which worked well a few years ago may not be yielding similar results right now. A breakout trader might need to start entering more trades on pullbacks to support if the market conditions warrant that. Certain technical aspects may deserve more attention than they used to if the trading environment suddenly changes, and the astute technician will know that if he’s doing his homework. After all, the market is always changing.

Become a student of the market. Commit to closely observing the results you’re getting, and be consistent in your approach long enough to decipher what’s working and what isn’t. Keep an open mind to what elements of your method might need adjusting, and remember that technical analysis is an ongoing practice. Mix it up when you know you should, and stay attentive to what your trades are telling you.

Trade well out there!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

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  1. From physician supply demand on Apr 8, 2008
  2. From Trading Education | on Jun 2, 2009

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