One of the first topics that a technical analyst is introduced and attracted to is charts and indicators. Chart patterns and indicators come with their own set of rules that you follow when you make trading decisions. Those patterns and indicators bring about some sort of certainty in something that is uncertain, giving the impression that technical analysis is simple. But realistically, amid uncertainty, nothing can really predict the future with certainty. The first step in technical analysis should be to understand the basics of price movement. And you can only do this through observation and practice. You have to know what's going on around you; only then will you be able to interpret chart patterns and indicators and use them as tools in your trading. You should be prepared to make mistakes, but it's those mistakes that will help you figure out the market.
The Technical Analysis of STOCKS & COMMODITIES interview this month is with trader Suri Duddella, starting on page 58. With this piece, you'll see that being a successful trader doesn't mean you have to blindly follow chart patterns. What you have to have is a solid understanding of the entire market and you must know the market you are trading. Only then can you bring all this information together and narrow it down to one trade.
Trading is not about following one trading system or one chart pattern or one indicator blindly. As a trader, you must consider yourself to be a unique individual. You cannot trade like somebody else. Your objective should be to find something that gives you an edge over others. You must come to grips with the fact that you cannot forecast what the price will do tomorrow, no matter how many charts you look at. A chart shows you what prices have done in the past, and you can use them to understand how you should react to future price moves.
So when you come across a trading system, whether it is SVAPO, the Fisher transform, or MIDAS (that's Andrew Coles's "The MIDAS Touch, Part 1," on page 24 in this issue), you have to make sure you understand the market first. Only after that should you determine how you can incorporate a system into the market you are trading.
Everybody has a different opinion about the market, and you are never going to know who is right or wrong until after the fact. Chart patterns, indicators, and trading systems are tools you can use. We've given you the tools. Your task is to use them intelligently and, most important, if you find that something that has worked well in the past is not working, don't be afraid to discard it and try something else. Understanding the markets is a continuous process.
Originally published in the September 2008 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2008, Technical Analysis, Inc.
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